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Reconciling Empirics and Theory: The Behavioral Hybrid New Keynesian Model

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  • Atahan Afsar; José Elías Gallegos; Richard Jaimes; Edgar Silgado Gómez
  • José Elías Gallegos
  • Richard Jaimes
  • Edgar Silgado Gómez
Abstract
Structural estimates of the standard New Keynesian model are at odds with microeconomic estimates. To reconcile these findings, we develop and estimate a behav- ioral New Keynesian model augmented with backward-looking households and firms. We find (i) strong evidence for bounded rationality, with a cognitive discount fac- tor estimate of 0.4 at quarterly frequency; and (ii) that the behavioral setting with backward-looking agents helps us in harmonizing the New Keynesian theory with em- pirical studies. We suggest that both cognitive discounting and anchoring are essential, first, to match empirical estimates for certain parameters of interest, and second, to obtain the hump-shaped and initially muted impulse-response functions that we observe in the data.

Suggested Citation

  • 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.
    • Handle: RePEc:col:000416:018560
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    1. 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.

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    More about this item

    Keywords

    New Keynesian; Bounded Rationality; Bayesian Estimation.;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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