We estimate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon planning (FHP) model outperforms rational expectations versions of the NK model as well as other behavioral NK models. In the FHP model, households and firms are forward-looking in thinking about events over their planning horizon but are backward-looking regarding events beyond that point. This gives rise to substantial aggregate persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation.
Gust, Christopher, Edward Herbst, and David López-Salido.
"Short-Term Planning, Monetary Policy, and Macroeconomic Persistence."
American Economic Journal: Macroeconomics,
General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
Price Level; Inflation; Deflation
Business Fluctuations; Cycles