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Estimating a Behavioral New Keynesian Model with the Zero Lower Bound

Author

Listed:
  • Yasuo Hirose

    (Keio University)

  • Hirokuni Iiboshi

    (Tokyo Metropolitan University)

  • Mototsugu Shintani

    (The University of Tokyo)

  • Kozo Ueda

    (Waseda University)

Abstract

We estimate a New Keynesian model incorporating two notable features: bounded rationality and the zero lower bound on the nominal interest rate. Our Bayesian estimation of a fully nonlinear model shows that the model with bounded rationality better fits the US data than its rational expectations counterpart and that both households and firms exhibit a substantial degree of bounded rationality. Moreover, we demonstrate that bounded rationality expands a parameter region in which the model can be estimated and weakens the power of forward guidance.

Suggested Citation

  • Yasuo Hirose & Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2022. "Estimating a Behavioral New Keynesian Model with the Zero Lower Bound," CARF F-Series CARF-F-535, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf535
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    References listed on IDEAS

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    1. Zhongjun Qu & Denis Tkachenko, 2012. "Identification and frequency domain quasi‐maximum likelihood estimation of linearized dynamic stochastic general equilibrium models," Quantitative Economics, Econometric Society, vol. 3(1), pages 95-132, March.
    2. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    3. Peter Ganong & Pascal Noel, 2019. "Consumer Spending during Unemployment: Positive and Normative Implications," American Economic Review, American Economic Association, vol. 109(7), pages 2383-2424, July.
    4. Ivana Komunjer & Serena Ng, 2011. "Dynamic Identification of Dynamic Stochastic General Equilibrium Models," Econometrica, Econometric Society, vol. 79(6), pages 1995-2032, November.
    5. Atahan Afsar; José Elías Gallegos; Richard Jaimes; Edgar Silgado Gómez & José Elías Gallegos & Richard Jaimes & Edgar Silgado Gómez, 2020. "Reconciling Empirics and Theory: The Behavioral Hybrid New Keynesian Model," Vniversitas Económica, Universidad Javeriana - Bogotá, vol. 0(0), pages 1-41, December.
    6. Nakata, Taisuke & Ogaki, Ryota & Schmidt, Sebastian & Yoo, Paul, 2019. "Attenuating the forward guidance puzzle: Implications for optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 90-106.
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