Jang, TaeSeok and Sacht, Stephen (2012): Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area.

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Abstract
In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid NewKeynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism  so called animal spirits  on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto and crosscovariances of the data which are slightly better than or equal to a model where rational expectations are assumed. This implies that the bounded rationality model provides some structural insights on the expectation formation process at the macrolevel for the Euro Area. First, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Second, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap.
Item Type:  MPRA Paper 

Original Title:  Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area 
Language:  English 
Keywords:  Animal Spirits; Bounded Rationality; Euro Area; NewKeynesian Model; Simulated Method of Moments 
Subjects:  E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E12  Keynes; Keynesian; PostKeynesian C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C53  Forecasting and Prediction Methods; Simulation Methods E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E32  Business Fluctuations; Cycles D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D83  Search; Learning; Information and Knowledge; Communication; Belief 
Item ID:  37399 
Depositing User:  Stephen Sacht 
Date Deposited:  16. Mar 2012 17:40 
Last Modified:  12. Feb 2013 01:57 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/37399 