Incorporating Diagnostic Expectations into the New Keynesian Framework

• 成果类型: Article
• 署名作者: L'Huillier, Jean-Paul; Singh, Sanjay R.; Yoo, Donghoon
• 署名单位: Federal Reserve System - USA; Federal Reserve Bank - Cleveland; Brandeis University; Brandeis University; Federal Reserve System - USA; Federal Reserve Bank - San Francisco; University of California System; University of California Davis; Academia Sinica - Taiwan; University of Osaka
• 刊物名称: REVIEW OF ECONOMIC STUDIES
• ISSN/ISSBN: 0034-6527
• DOI: 10.1093/restud/rdad101
• 发表日期: 2023
• 页码: 3013-3046
• 关键词: news; probability; INFORMATION; prices; models; shocks; POLICY; noise

摘要

Diagnostic expectations constitute a realistic behavioural model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus forecast data. Our estimate of the diagnosticity parameter is in line with previous studies. Moreover, we find empirical evidence in favour of the diagnostic model. Diagnostic expectations offer new propagation mechanisms to explain fluctuations.