Behavioral New Keynesian Models: Learning vs. Cognitive Discounting

28 Pages Posted: 5 May 2021

See all articles by Greta Meggiorini

Greta Meggiorini

University of California, Irvine - Department of Economics

Fabio Milani

University of California, Irvine - Department of Economics

Date Written: 2021

Abstract

This paper estimates a New Keynesian model with new and old behavioral elements. Agents in the model exhibit cognitive discounting, or myopia: they discount variables far into the future at higher rates than typically implied in the benchmark model. We investigate the model under different expectational assumptions: rational expectations, subjective expectations with infinite-horizon learning, and subjective expectations with Euler-equation learning. Under rational expectations, the model necessitates of large, possibly unrealistically so, degrees of myopia. The same result persists under infinite-horizon learning, given that agents are still remarkably farsighted. But, under Euler-equation learning, the model can fit the data with only minimal estimated degrees of myopia. The results indicate that the empirical evidence for cognitive discounting may be sensitive to the modeling of expectations, and they highlight learning as a key behavioral feature to understand macroeconomic fluctuations.

JEL Classification: E310, E320, E520, E580, E700

Suggested Citation

Meggiorini, Greta and Milani, Fabio, Behavioral New Keynesian Models: Learning vs. Cognitive Discounting (2021). Available at SSRN: https://ssrn.com/abstract=3837767 or http://dx.doi.org/10.2139/ssrn.3837767

Greta Meggiorini (Contact Author)

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Fabio Milani

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

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