A Behavioral New Keynesian Model
- American Economic Review (Forthcoming)
This paper analyzes how bounded rationality affects monetary and
fiscal policy via an empirically-relevant enrichment of the New
Keynesian model. It models agents' partial myopia towards distant
atypical events using a new microfounded "cognitive discounting"
parameter. Compared to the rational model: (i) there is no forward
guidance puzzle; (ii) the Taylor principle changes— with passive
monetary policy but enough myopia equilibria are determinate and
economies stable; (iii) the zero lower bound is much less costly;
(iv) price-level targeting is not optimal; (v) fiscal stimulus is effective; (vi) the model is "neo-Fisherian" in the long run, Keynesian
in the short run.
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