Monetary Policy Under Behavioral Expectations: An Empirical Validation of the Heuristic Switching Model

• Název práce v češtině: Monetární politika za předpokladu behaviorálních očekávání: Empirická validace heuristického modelu
• Název v anglickém jazyce: Monetary Policy Under Behavioral Expectations: An Empirical Validation of the Heuristic Switching Model
• Klíčová slova: Behaviorální makroekonomie, heterogenní očekávání, nový keynesiánský model, heuristický model, metoda simulačních momentů
• Klíčová slova anglicky: Behavioral macroeconomics, heterogeneous expectations, New-Keynesian model, Heuristic Switching Model, simulated method of moments
• Akademický rok vypsání: 2017/2018
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jiří Kukačka, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 01.06.2018
• Datum zadání: 01.06.2018
• Datum a čas obhajoby: 09.06.2020 09:00
• Datum odevzdání elektronické podoby: 07.05.2020
• Datum proběhlé obhajoby: 09.06.2020
• Oponenti: Mgr. Tomáš Kučera

Seznam odborné literatury

Anufriev, M. and Hommes, C. (2012): ‘Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments’, American Economic Journal: Microeconomics, 4(4), pp. 35-64.

Brock, W. and Hommes, C. (1997): ‘A Rational Route to Randomness’, Econometrica, 65, pp. 1059-1095.

Fagan, G., Henry, J. and Mestre, R. (2005): ‘An area-wide model for the Euro area’, Economic Modelling, 22(1), pp. 39-59.

Franke, R., Jang, T.-S. and Sacht, S. (2015): ‘Moment matching versus Bayesian estimation: backward-looking behavior in the New-Keynesian baseline model’, The North American Journal of Economics and Finance, 31, pp. 126-154.

Hommes, C., Massaro, D. and Weber, M. (2017): ‘Monetary Policy under Behavioral Expectations: Theory and Experiment’, Bank of Lithuania Working Paper, No. 42/2017.

Jang, T.-S. and Sacht, S. (2017): ‘Modeling consumer confidence and its role for expectation formation: A horse race’, Kiel University Economics Working Paper, No. 2017-04.

Předběžná náplň práce v anglickém jazyce

Research question and motivation

Expectations play an important role in macroeconomics. Agent-based modeling provides an opportunity to incorporate virtually any expectations formation mechanisms into economic models and then analyze dynamic and stochastic properties of the models by running multiple simulations under different parameter settings.

One of such mechanisms is the 4-type Heuristic Switching Model (HSM) developed by Brock and Hommes (1997) and extended by Anufriev and Hommes (2012). Recently, Hommes et al. (2017) employed the HSM as the expectations formation mechanism in the baseline three-equation New Keynesian model to conduct monetary policy analysis and concluded that the current European Central Bank’s (ECB) policy rule might be not the optimal one. The question this thesis will aim at examining is whether the model they used can be fitted to real macroeconomic data.

From a theoretical perspective, we would like to verify whether the experiments with human subjects which gave rise to the development of the HSM are suitable for inference about the expectations formation process in the real-world setting. In addition to that, the HSM has relatively many parameters, and so it will be interesting to examine the presence of a trade-off between accuracy and simplicity by comparing its empirical performance to the performance of the ‘pure technical block’ (PTB) from Jang and Sacht (2017), a simple 2-type expectations formation mechanism which outperformed all other models (including the hybrid version of the New Keynesian model) in their study in terms of fitness to the Euro area data.


Contribution

From a practical perspective, this thesis will provide a robustness check for the monetary policy recommendations presented in Hommes et al. (2017). Because the authors mention the ECB as a potential beneficiary of their conclusions, it is important to examine whether the model used in their study fits macroeconomic data. The Euro area macroeconomic time series will be utilized, so the results of the thesis will be particularly applicable for the ECB policymakers.

From a theoretical perspective, the thesis can be viewed as an examination of the empirical performance of one of the most prominent expectations formation mechanisms in the literature on learning and bounded rationality. That is, the thesis will contribute to the field by shedding some light on the appropriateness of learning-to-forecast experiments with human subjects as a source of insights into individuals’ expectations formation process in the context of macroeconomics. In addition, the thesis will effectively extend the work of Jang and Sacht (2017) by introducing a new scenario to their ‘horse race’.


Methodology

The thesis will estimate the baseline three-equation New Keynesian model with the HSM as the expectations formation mechanism. As a benchmark to evaluate the model’s empirical performance, the PTB will be employed. We will use the Area-Wide Model database (https://eabcn.org/page/area-wide-model) as the data source, and the Simulated Method of Moments as the estimation approach.


Outline

1. Introduction
2. Literature review
3. The model
4. Methodology
5. Data
6. Results and discussion
7. Conclusion