That is, optimism (pessimism) leads to an increase (decline) in output, and the increase (decline) in output in term intensifies optimism (pessimism) (De Grauwe 2012, De Grauwe and Ji 2017a). Executive Summary This thesis strives to enrich macroeconomic theories with behavioural components. These reforms lead to a lowering of mark ups in the goods and labour markets and move the economy closer to perfect competition. However, when we go too far with structural reforms, we go beyond the minimum point on the line. We conclude that the degree of flexibility has profound effects on the trade-offs central banks encounter in their attempts to stabilise the economy. Paul De Grauwe recently wrote a textbook on Behavioral Macroeconomics. As we increase the degree of flexibility, we move down along the downward sloping segment of the line. The agent uses an endogenously simpli ed, or \sparse," model of the world and the conse-quences of his actions and acts according to a behavioral Bellman equation. We need to do better – and that is what we have been trying to do in a series of publications (De Grauwe 2012, De Grauwe and Corrado 2015, De Grauwe and Ji 2016, 2017a). As a result, these agents are only capable … These cannot be easily explained in standard macroeconomic models except by (again) assuming common exogenous shocks. 0000004481 00000 n 0000001525 00000 n 0000013738 00000 n Thus, our behavioural model predicts that in the real world the output gap does not follow a normal distribution, but is characterised by excess kurtosis and fat tails. Eggertson et al. 1.2 Behaviour. I argue that the insights from behavioral economics have led to important progress in our understanding of macroeconomic phenomena. This also leads to a two-way causality. Behavioural and Post-Keynesian Foundations for a new Macroeconomics Steven Hail A thesis submitted to Flinders University in fulfilment of the requirements for the degree of Doctor of Philosophy Flinders Business School March 2016 . Cacciatore, M, R Duval and G Fiori (2012) “Short-term gain or pain? Akerlof (2002) Behavioral Macroeconomics and Macroeconomic Behavior Camerer and Loewenstein (2004) Behavioral Economics: Past, Present, Future Crawford (2013) Boundedly Rational versus Optimization-Based Models of Strategic Thinking and Learning in Games Fudenberg (2006) Advancing beyond Advances in behavioral economics Alfarano, S, T Lux and F Wagner (2005), “Estimation of agent-based models: The case of an asymmetric herding model”, Computational Economics 26: 19–49. 0000004546 00000 n New eBook: DSGE Models in the Conduct of Policy: Use as intended. Smets, F and R Wouters (2007), “Shocks and frictions in US business cycles: A Bayesian DSGE approach”, American Economic Review 97(3): 586–606. Fagiolo et al. The economics of insurance and its borders with general finance, Maturity mismatch stretching: Banking has taken a wrong turn. There is now a significant body of empirical evidence showing that the output gaps (and also the growth of output) in OECD countries do not exhibit a Gaussian distribution, but are characterised by excessive kurtosis and fat tails. 0000004230 00000 n Behavior is always assumed to be rational: given the restrictions imposed by the primi- tives, all actors in the economic models are assumed to maximize their objectives. For values of b2 exceeding 0.5, these trade-offs become positively sloped – that is, when c1 (the inflation parameter in the Taylor rule) increases, both inflation and output volatility decline. This is provided under the Russell Sage Foundation. In fact, we can see from Figure 1 that the positively sloped ‘trade-offs’ move upward and to the left (indicated by the arrow) for increasing levels of flexibility (b2). Presently, many macroeconomic models, representing different theories, [4] are derived by aggregating microeconomic models allowing economists to test them with both macroeconomic and … Just like economics consists of micr oeconomics and macroeconomics, both finance and behavioral finance can be similarly . 0000006212 00000 n (2009) carried out important econometric analysis documenting the non-normality of the distribution of output gaps and growth rates of GDP. Launched jointly with the Alfred P. Sloan Foundation in 1986, the program was instrumental in the development of this new In these models, structural reforms in labour markets include relaxing job protection, cuts in unemployment benefits, and so on; in product markets the reforms include reductions in barriers to entry for new firms. a "Behavioral Macroeconomics" in order to explain "Macroeconomic Behav- ... 3 lays the foundations for an alternative explanation by analysing the main assumptions of the New Keynesian model putting particular emphasis on the role of the time horizon, money, and capital accumulation. Therefore, these reforms can be seen as shifting the supply curve to the right, increasing the production potential of countries. This point is obtained when flexibility is zero (i.e. 88 0 obj << /Linearized 1 /O 92 /H [ 1889 543 ] /L 134622 /E 15514 /N 23 /T 132744 >> endobj xref 88 58 0000000016 00000 n Figure 2 The optimal level of flexibility. 0000010271 00000 n 0000011518 00000 n There is a growing number of researchers developing ‘agent-based’ models and ‘behavioural’ macroeconomic models (Alfarano et al. Gigerenzer, G and R Selten (2002), Bounded rationality, Cambridge: MIT Press. Instead, these agents use simple forecasting rules (heuristics) and evaluate the forecasting performances of these rules ex post. 0000004416 00000 n Farmer, R, J Doyne and D Foley (2009), “The economy needs agent-based modelling”, Nature 460: 685-686. John Paulson Chair in European Political Economy, London School of Economics, and former member of the Belgian parliament. Eggertsson, G, A Ferrero and A Raffo (2014), "Can structural reforms help Europe?" No wonder, then, that central banks like structural reforms that increase the flexibility of the economy. Contrary to mainstream top-down models in which agents are capable of understanding the whole picture and use this superior information to determine their optimal plans, the models used in this book are bottom-up models in which all agents experience cognitive limitations. �G��k>U'D���N��_�F�F,=��*ܙ���P��:�i_��^��}i��,�=�C����=�n�/��6��� ��Ņ11��Cљ7��\Ji��#�֧��n�xfsܷ���+㤈:�q$�� �6�:����I����)g��O>x��,y�z9J���䝙OW8�‡� The seven principles: Other people’s behaviour matters: people do many things by observing others and copying; people are encouraged to continue to do things when they feel other people approve of their b The force of this criticism has been reduced by the second reason for incorporating behavioral economics results into macroeconomics: cognitive psychologists and experimental economists have documented a number of systematic deviations between the decisions of human beings and those of the “economic man.” (2008) and Fagiolo et al. Towards a behavioural foundation of macroeconomics XX, 228 S., graph. 0000003307 00000 n I shall begin my review by describing one of my ear- liest attempts in this fi eld, which led to the discovery of the role of asymmetric information in markets. Hommes, C (2016), “Behavioural macroeconomics with heterogeneous expectations and interacting agents”, Discussion Paper, CenDEF, University of Amsterdam. It instead has the more modest goal of proposing an empirically sound way of measuring the well-being losses stemming from macroeconomic … In order to do so, we constructed policy trade-offs of the central bank for different levels of flexibility. 0000010819 00000 n The workshop will take place at the University of Bamberg, Germany. The latter is measured by the sensitivity of inflation to the output gap in the New Keynesian Philips curve (called b2). However, the results of these models depend on the assumption that the shocks are serially-correlated. June 2018. 0000003424 00000 n (DE-101)1001494865: Material Type: Document, Thesis/dissertation, Internet resource: Document Type: Internet Resource, Computer File: All Authors / Contributors: Johannes Kaiser. 0000003968 00000 n The Foundations of Behavioral Economic Analysis will be an indispensable resource for students and scholars who wish to understand where the action is." Thus, one can conclude that when the economy is very rigid, a central bank that pursues its inflation target with increasing intensity faces a classical negatively sloped trade-off between inflation and output volatility. In an ideal world, defaults, frames, and price anchors would not have any bearing on consumer choices. - Martin Dufwenberg, University of Arizona "Sanjit Dhami's Foundations of Behavioral Economic Analysis is a major and most impressive achievement. 0000003490 00000 n 0000002410 00000 n 2011, Gabaix 2014, Westerhoff and Franke 2012, Hommes 2016, Hommes and Lustenhouwer 2016, Muellbauer 2017; see also the recent criticism of Blanchard 2017 and the chapters in Gürkaynak and Tille 2017). Nothing in the model creates endogenous business cycle movements. Application of the models highlights how the trade-off between output and inflation is moderated by the flexibility of the economy. Figure 1 Trade-off between output and inflation. These come close to the observed correlations. We introduce structural reforms in the context of this behavioural model through two channels. 0000006190 00000 n We also found, however, that there is a limit to the comfort flexibility can provide to central bankers. 0000005390 00000 n De Grauwe, P and Y Ji (2017a) “Inflation targets and the zero lower bound in a behavioural macroeconomic model", Economica, forthcoming. 0000007571 00000 n Behavioral Foundations for Keynesian Macroeconomics: The Consumption Function Fabio D’Orlando and Eleonora Sanfilippo∗ Preliminary Draft Abstract This paper aims to discuss: (i) the presence of behavioral assumptions in Keynes’s General Theory; and (ii) the possibility of grounding a Keynesian-type consumption function Homo economicus continues to reign supreme in dynamic stochastic general equilibrium (DSGE) models. Akerlof, G and R Shiller (2009) Animal spirits: How human psychology drives the economy and why it matters for global capitalism, Princeton University Press. 0000004688 00000 n In this case, the trade-off is negatively sloped. A world without the WTO: what’s at stake? … We achieve this without the need to invoke common exogenous shocks (De Grauwe and Ji 2016). Gabaix, X (2014), “A sparsity-based model of bounded rationality”, The Quarterly Journal of Economics, 1661–1710. 0000001684 00000 n This adaptive learning assumption introduced in an otherwise standard New Keynesian macroeconomic model produces endogenous waves of optimism and pessimism (animal spirits) that drive the business cycle in a self-fulfilling way. And scholars who wish to understand Figure 1 let us first concentrate on assumption... Behavioral macroeconomists are rebuilding the microfoundations that were sacked by the flexibility of wages and prices can have profound on... 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