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Booms and Busts. New Keynesian and Behavioral explanations - - PowerPoint PPT Presentation
Booms and Busts. New Keynesian and Behavioral explanations - - PowerPoint PPT Presentation
Booms and Busts. New Keynesian and Behavioral explanations
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Two stylized facts
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Objective of my presentation
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The model: structure is the same in behavioral model and in DSGE
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t t t t t t t t + − + 1 2 1 1 1 1
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t t t t t t
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t t t t t
u r c y c c r + + + − =
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Introducing heuristics: output forecasting
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- utput forecasting
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t eyt +1
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Inflation forecasts
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* 1
ˆ π π =
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Introducing discipline
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Forecast performance
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U f ,t = − ω k
k=0 ∞
∑
yt −k−1 − ˜ E f ,t −k−2yt−k
[ ]
2
Ue,t = − ω k
k=0 ∞
∑
yt −k−1 − ˜ E
e,t −k−2yt −k
[ ]
2
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Applying discrete choice theory
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U U U γ γ γ α + =
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U U U
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Note on learning
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Calibrating the model
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Output gap
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Correlation animal spirits and output gap
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Conditions for animal spirits willingness to learn and forgetting
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Inflation: credibility is fragile
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Two different business cycle theories
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Non-normality created by animal spirits
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Contrast between two models
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Applying these different views to present economic downturn
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The role of output stabilization
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The trade-off
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Policy implications
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Some fiscal policy experiments
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Impulse response to 1 s.d fiscal policy shock (extra spending)
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Animal Spirits: some empirics
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US Output gap and Michigan sentiment index
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Source: US Department of Commerce, Bureau of Economic Analysis, and University of Michigan: Consumer Sentiment Index.
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Michigan
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Conclusion: some policy implications
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