Estimating a Behavioral New Keynesian Model with the Zero Lower Bound

Yasuo Hirose · Hirokuni Iiboshi · Mototsugu Shintani · Kōzō Ueda

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Abstract We estimate a New Keynesian model incorporating two notable features: bounded rationality and the zero lower bound on the nominal interest rate. Our Bayesian estimation of a nonlinear model shows that the model with bounded rationality better fits the U.S. data than its rational expectations counterpart, and that both households and firms exhibit a substantial degree of bounded rationality. Moreover, we demonstrate that bounded rationality expands a parameter region in which the model can be estimated and weakens the power of forward guidance.

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References

2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 2020A Behavioral New Keynesian Model 2017The Empirical Implications of the Interest-Rate Lower Bound 2016The Zero Lower Bound and Endogenous Uncertainty 2019Bounded rationality, monetary policy, and macroeconomic stability 2022Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan

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