Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model

Hajdini, Ina

doi:10.1257/mac.20230054

Abstract

I consider a New Keynesian framework where agents鈥� expectations are based on a combination of mis-specified forecasts and myopia. Such expectations are consistent with forecasters鈥� late over-shooting, under-reaction to forecast revisions, and over-reaction to current inflation. Estimation of the general equilibrium model shows that data prefer a combination of autoregressive mis-specified forecasting rules and myopia, learning of mis-specified forecasting rules improves model fit, and the proposed expectations generate internal persistence and amplification to exogenous shocks. Model-implied inflation expectations data fit survey data well and reveal that learning of mis-specified forecasting rules is preferred to match the evidence on forecasts.

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