Working Paper: CEPR ID: DP16141
Authors: J. David López-Salido; Christopher Gust; Edward Herbst
Abstract: This paper estimates a behavioral New Keynesian (NK) model in which households and firmsplan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versionsof the NK model as well as other behavioral NK models. In the FH model, households andfirms are forward-looking in thinking about events over their planning horizon but are backwardlooking regarding events beyond that point. This gives rise to substantial aggregate persistencewithout resorting to additional features such as habit persistence and price contracts indexedto lagged inflation.
Keywords: finite-horizon; planning; learning; monetary policy; New Keynesian model; Bayesian estimation
JEL Codes: C11; E52; E70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| finite-horizon (fh) model (C41) | persistence in output and inflation (E31) |
| short planning horizons (D25) | sluggish consumption and pricing decisions (D12) |
| sluggish consumption and pricing decisions (D12) | aggregate persistence (C43) |
| fh model (G59) | inflation persistence (E31) |
| fh model (G59) | output costs of disinflation (E31) |
| monetary policy responsiveness to expected future inflation (E63) | fit to the data (C52) |