Jang, Tae-Seok and Sacht, Stephen (2012): Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area.
Download (258Kb) | Preview
In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian 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 cross-covariances 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 macro-level 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|
|Keywords:||Animal Spirits; Bounded Rationality; Euro Area; New-Keynesian Model; Simulated Method of Moments|
|Subjects:||E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes; Keynesian; Post-Keynesian
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
|Depositing User:||Stephen Sacht|
|Date Deposited:||16. Mar 2012 17:40|
|Last Modified:||12. Feb 2013 01:57|
Ahrens, S. and Sacht, S. (2012): Estimating a High-Frequency New Key- nesian Phillips Curve, Kiel Working Paper 1686, Kiel Institute for the World Economy, March 2012.
Akerlof, G. and Shiller, R. (2009): Animal Spirits. How Human Psy- chology Drives the Economy and Why it Matters for Global Capitalism, New Jersey: Princeton University Press.
Andrews, D. (1991): Heteroscedasticity and autocorrelation consistent covariance matrix estimation, Econometrica, Vol. 59, pp. 817–858.
Ascari, G. and Ropele, T. (2009): Trend Inflation, Taylor Principle, and Indeterminacy, Journal of Money, Credit and Banking, Vol. 41 (8), pp. 1557–1584.
Assenmacher-Wesche, K. and Gerlach, S. (2008): Interpreting Euro Area Inflation at High and Low Frequencies, European Economic Review, Vol. 52, pp. 964–986.
Binder, M. and Pesaran, M.H. (1995), Multivariate rational expectations models and macroeconomic modelling: A review and some new results. In: Pesaran, M.H. and Wickens, M. (ed.), Handbook of Applied Econometrics: Macroeconomics, Oxford: Basil Blackwell, pp. 139–187. Camerer, C. (1998): Bounded Rationality in Individual Decision Making, Ex- perimental Economics, Vol. 1, pp. 166–183.
Castelnuovo, E. (2010): Trend Inflation and Macroeconomic Volatilities in the Post WWII U.S. Economy, North American Journal of Economics and Fi- nance, Vol. 21, pp. 19–33.
Chari, V. V., Kehoe, P. J. and Mcgrattan, E. R. (2000): Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?, Econometrica, Vol. 68 (5), pp. 1151–1179. Chiarella, C. and He, T. (2002): Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model. Computational Economics, Vol. 19, pp. 95–132.
Cogley, T. and Sbordonne, A.M. (2008): Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve, The American Eco- nomic Review, Vol. 98 (5), pp. 2101–2126.
Cogley, T. Primiceri, G. E. and Sargent, T. J. (2010), Inflation-Gap Persistence in the US, American Economic Journal: Macroeconomics, Vol. 2(1), pp. 43–69.
Colander, D., Fllmer, H., Haas, A., Goldberg, M., Juselius, K., Kirman, A., Lux, T. and Sloth, B. (2009): The Financial Crisis and the Systemic Failure of Academic Economics, Critical Review: A Journal of Poli- tics and Society, Vol. 21 (2-3), pp. 249–267.
Davidson, R. and MacKinnon, G. (2004), Econometric Theory and Meth- ods, New York: Oxford University Press.
De Grauwe, P. (2011): Animal Spirits and Monetary Policy , Economic The- ory, Vol. 47(2–3), pp. 423–457.
Duffie, D. and Singleton, K. (1993): Simulated Moments Estimation of Markov Models of Asset Prices, Econometrica, Vol. 61(4), pp. 929–952.
Evans, G. and Honkapohja, S. (2001): Learning and Expectations in Macroe- conomics, New Jersey: Princeton University Press.
Fagan, G., Henry, J. and Mestre, R. (2001): An Area Wide Model (AWM) for the Euro Area, ECB working paper 42. Forsells, M. and Kenny, G. (2004): Survey Expectations, Rationality and the Dynamics of Euro Area Inflation, Journal of Business Cycle Measurement and Analysis, Vol. 2004(1), pp. 13–41.
Franke, R. (2012): Microfounded Animal Spirits in the New Macroeconomic Consensus, Studies in Nonlinear Dynamics and Econometrics, forthcoming.
Franke, R., Jang, T.-S. and Sacht, S. (2011): Moment Matching ver- sus Bayesian Estimation: Backward–Looking Behaviour in the New-Keynesian Three-Equations Model, Economics Working Paper 2011–10, Department of Economics, Christian-Albrechts-University of Kiel, Oktober 2011.
Hommes, H. (2006): Heterogeneous Agent Models in Economics and Finance, in: Tesfatsion, L. and Judd, K.(ed.), Handbook of Computational Economics, Vol. 2, Chapter. 23, pp. 1109-1186.
Hommes, C. (2011): The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab, Journal of Economic Dynamics and Control, Vol. 35 (1), pp. 1–24.
Jang, T.-S. (forthcoming): A Comparison between Models of Market Behav- iors: A Formal Test to New-Keynesian Three-Equations and Structural Stochas- tic Volatility Models, Advances in Econometrics, Vol. 28, forthcoming.
Kahneman, D. (2003): Maps of Bounded Rationality: Psychology for Behavioral Economics, The American Economic Review, Vol. 93(5), pp. 1449–1475.
Keynes, J. M. (1936): The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press. Lee, B. S. and Ingram, B. (1991): Simulation estimation of time-series models, Journal of Econometrics, Vol. 47(2-3), pp. 197–205.
Lengnick, M. and Wohltmann, H.-W. (2011): Agent-based Financial Mar- kets and New Keynesian Macroeconomics - A Synthesis, Economics Working Paper 2011–09, Department of Economics, Christian-Albrechts-University of Kiel, September 2011.
Lux, T. (2009): Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey, Journal of Economic Behavior and Organization, Vol. 72(2), pp. 638–655.
Mankiw, N.G. and Reis, R. (2002): Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve, The Quarterly Journal of Economics, Vol. 117(4), pp. 1295–1328.
Newey, W. and West, K. (1987): A Simple Positive Semi-Definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix, Economet- rica, Vol. 55, pp. 703–708.
Newey, W. and West, K. (1994): Automatic Lag Selection in Covariance Matrix Estimation, Review of Economic Studies, Vol. 61(4), pp. 631–53.
Russell, B. and Banerjee, A. (2008): The Long-run Phillips Curve and Non-stationary Inflation, Journal of Macroeconomics, Vol. 30, pp.1792-1815.
Sargent, T.J. (1994): Bounded Rationality in Macroeconomics, New York: Oxford.
Selten, R. (2001): What is Bounded Rationality?, in: Gigerenzer, G. and Selten, R. (Ed.) (2001): Bounded rationality: The adaptive toolbox, Cambridge: The MIT Press, pp. 13–36.
Shiller, R. (1978): Rational Expectations and the Dynamic Structure of Macroeconomic Models: A Critical Review, Journal of Monetary Economics, Vol. 4(1), pp. 1–44.
Sims, C. (2003): Implications of Rational Inattention, Journal of Monetary Economics, Vol. 50(3), pp. 665–690.
Smets, F. and Wouters, R. (2003): An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area, Journal of the European Economic Association, Vol. 1, pp. 1123–1175.
Smets, F. and Wouters, R. (2005): Comparing Shocks and Frictions in US and Euro Area Business Cycles: a Bayesian DSGE Approach, Journal of Applied Econometrics, Vol. 20(2), pp. 161–183.
Smets, F. and Wouters, R. (2007): Shocks and frictions in US business cycles: A Bayesian DSGE approach, American Economic Review, Vol. 97, pp. 586–606.
Westerhoff, F. (2008): The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies, Journal of Economics and Statis- tics, Vol. 228, pp. 195–227.