Research

Published and unpublished papers by Wei Xiao

The Epidemiology of Expectations In A New Keynesian Model

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With Yangyang Ji.

Households and firms are not econometricians. Instead, they simply believe the economic forecasts that they hear from the news media. The spread of news is similar to the spread of infec- tious disease, and can be described by the “common source” version of Kermack and McKendrick (1927)’s model of epidemiology. A susceptible individual who is exposed to the disease (news) in a given period has a fixed probability of catching the disease (forecasts). The economic forecasts in the news come from a professional forecaster who is either a fundamentalist or a statistician. The economy can reach a special version of a Restricted Perceptions Equilibrium. We show that with a forward guidance policy that specifies a future path of the nominal interest rate that is near the zero lower bound, the response of economic aggregates do not overshoot, as in rational expectations models. This exercise helps us understand the “forward guidance puzzle” and the recent debate about Neo-Fisherianism.

Download working paper here.

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Written by wxiao

March 12, 2017 at 8:05 pm

Posted in Uncategorized

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