Modeling expectations in agent-based models - An application to central bank's communication and monetary policy

Authored by Isabelle L Salle

Date Published: 2015

DOI: 10.1016/j.econmod.2014.12.040

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Pseudocode Mathematical description

Model Code URLs: Model code not found

Abstract

Expectations play a major role in macroeconomic dynamics, especially regarding the conduct of monetary policy. Yet, modeling the interplay between communication, expectations and aggregate outcomes remains a challenging task, mainly because this requires deviation from the paradigm of rational expectations and perfect information. While agent-based macro models allow for such a deviation, their representation of expectations dynamics often remains simplistic. This paper introduces an expectation formation model which allows us to integrate a wide range of information disclosed by central banks. This expectation model is then integrated to the macroeconomic ABM developed in Salle et al. 2013 - {[}Economic Modelling, 2013, 34, 114-1281, and yields aggregate results strongly in line with empirical evidence. In particular, we find that i) opacity is always sub-optimal, giving rise to the so-called opacity bias, ii) communication loosens the trade-off between the two objectives of monetary policy, and iii) forward guidance acts as a partial substitute for policy actions, and softens the optimal policy responses. This expectation model appears therefore promising to develop macroeconomic agent-based models. (c) 2015 Elsevier B.V. All rights reserved.

Tags

algorithms Bounded rationality Neural-networks Heterogeneous expectations Rational-expectations Macroeconomic model