Ina Hajdini

job market seminar
online

Ina Hajdini

School of Economics, LeBow College of Business, Drexel University
Misspecified forecasts and myopia in an estimated New Keynesian Model
Date(s)
Thursday, January 28 2021| 2:00pm to 3:15pm
Abstract

The paper considers a New Keynesian model in which agents form expectations based on a combination of misspecified forecasts and myopia. The proposed expectations formation process is tested against Rational Expectations (RE), as well other assumptions about expectations, with inflation forecasting data from the U.S. Survey of Professional Forecasters. The paper then derives the general equilibrium solution consistent with the proposed expectations formation process and estimates the model with likelihood-based Bayesian methods. The paper yields three novel results: (i) Data strongly prefer the combination of autoregressive misspecified forecasting rules and myopia over other alternatives, including RE or RE subject to information rigidities; (ii) The best fitting expectations formation process for both households and firms is characterized by high degrees of myopia and simple AR(1) forecasting rules; (iii) Despite the absence of real rigidities typically found necessary for New Keynesian models with RE, the estimated model with autoregressive forecasts and myopia generates substantial internal persistence and amplification to exogenous shocks.

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