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Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach

Author

Listed:
  • Elton Beqiraj

    (Sapienza University of Rome)

  • Giovanni Di Bartolomeo

    (Sapienza University of Rome
    Ministry of Economy and Finance)

  • Marco Di Pietro

    (Sapienza University of Rome)

  • Carolina Serpieri

    (Sapienza University of Rome
    Joint Research Centre (JRC), European Commission)

Abstract

By using Bayesian techniques, our paper investigates behavioral New-Keynesian DSGE models derived under two parsimonious alternatives to introduce heterogeneous expectations: the Euler equation and the anticipated-utility approach. First, we explore the relation between the expectation formation processes and the model determinacy for a broad range of parameterizations by using global sensitivity analysis and Monte Carlo filtering. Second, we perform model comparison to assess how much the two alternatives are consistent with macro and expectation survey data. Our main results are twofold: (1) model determinacy is strongly undermined by the presence of boundedly rational agents; (2) a behavioral model based on Euler equation approach fits the data decisively better than one based on anticipated utility.

Suggested Citation

  • Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2020. "Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach," Journal of Economics, Springer, vol. 130(3), pages 249-273, August.
    • Handle: RePEc:kap:jeczfn:v:130:y:2020:i:3:d:10.1007_s00712-020-00697-6
    DOI: 10.1007/s00712-020-00697-6
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    More about this item

    Keywords

    Monetary policy; Bounded rationality; Heterogeneous expectations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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