Experimental Evidence for Heterogeneous Expectations in a Simple New Keynesian Framework

Atticus David Holm Graven

OAI: oai:digitalcommons.ursinus.edu:bus_econ_hon-1004

This paper is a two-dimensional analysis of agent behavior in a standard New Keynesian (NK) Macroeconomic model. On the dimension of pure mathematics, we analyze the parameters of the NK model and of possible prediction rules. On the other dimension we continue a practice of empirical study of heterogeneous expectations with an experiment. The experiment will ask participants to make predictions of future output and inflation. Their responses will create a data-set upon which analysis will be performed to illuminate and corroborate current theories of economic decision making. The literature has shown that most agents' forecasting rules can be modeled by basic linear formulae. We conclude that some subject's predictions are consistent with recursively updating coefficient models, while others still use more inscrutable methods. Despite this, and regardless of which model fit them best, the subjects' errors were all of similar magnitudes.

naive expectations Rational Expectations Hypothesis agents perceived laws of motion future inflation rate future output gap New Keynesian model Feedback Matlab learning rule game PREDICTIONS Applied Mathematics Behavioral economics Dynamic systems Economics Macroeconomics Social and Behavioral Sciences