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Christian-Albrechts-Universität zu Kiel

Institut für Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2018-10




Tae-Seok Jang, Stephen Sacht




Macroeconomic Dynamics under Bounded Rationality: On the Impact of Consumers' Forecast Heuristics
Abstract In this study, we analyze the macroeconomic dynamics under various shocks in two competing frameworks. Given the baseline New-Keynesian model, we compare the impulse response functions that stem from the hybrid version under rational expectations with the ones obtained in the forward-looking version under bounded rationality. For the latter, we assume heterogeneous agents who may adopt various forecast heuristics. We seek to understand which framework mimics real-world adjustments well and is therefore most suitable to describe economic adjustments over the business cycle.

Keywords: Bounded Rationality, Consumer Expectations, Forecast Heuristics, Impulse Response Functions, New-Keynesian Model

JEL classification: C53, D83, E12, E21, E32




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