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Persistence and scarring in a non-linear new Keynesian model with experienced-based-expectations

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  • Jaqueson K. Galimberti

Abstract

Experienced-based-expectations allow the outcomes people experience to shape their views regarding future outcomes. We describe three forms of experienced-based-expectations and show how they can be applied in general equilibrium. The three expectations processes differ according to the nature of the information people use to form expectations and according to how well people understand their economic environment. In the context of a non-linear new Keynesian business cycle model, we show that experienced-based-expectations generally lead to increased volatility and sustained persistence, akin to scarring, relative to rational expectations. Through this expectations channel, periods of sustained bad outcomes, such as systematically low aggregate technology shocks, lead to persistently lower inflation. Changes in the inflation target have a greater effect on behavior when expectations are formed using outcomes on endogenous variables than when they are formed using outcomes on the shocks.

Suggested Citation

  • Jaqueson K. Galimberti, 2021. "Persistence and scarring in a non-linear new Keynesian model with experienced-based-expectations," CAMA Working Papers 2021-69, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-69
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-08/69_2021_dennis.pdf
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    More about this item

    Keywords

    Experience; expectations; learning; persistence; scarring; macroeconomic dynamics;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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