Published:
Cambridge, Mass: National Bureau of Economic Research, April 2018
Published in:NBER working paper series ; no. w24545
Extent:
1 Online-Ressource
Language:
English
DOI:
10.3386/w24545
Identifier:
Reproduction note:
Hardcopy version available to institutional subscribers
Origination:
Footnote:
Mode of access: World Wide Web
System requirements: Adobe [Acrobat] Reader required for PDF files
Description:
We consider a stationary setting featuring forward-looking behavior, higher-order uncertainty, and learning. We obtain an observational equivalence result that recasts the aggregate dynamics of this setting as that of a representative-agent model featuring two distortions: myopia in the sense of extra discounting of the future; and anchoring of the current outcome to the past outcome, as in models featuring habit persistence, adjustment costs, or momentum. This builds a bridge to both the DSGE literature and an emerging literature on bounded rationality. We further show that the as-if distortions are larger when the general-equilibrium interaction is stronger; this property reflects the role of higher-order uncertainty and helps reduce the gap between macroeconomic and microeconomic estimates of adjustment frictions. We illustrate the quantitative potential of our theory in the context of inflation by showing how it can help rationalize existing estimates of the Hybrid NKPC while also matching survey evidence on expectations. We discuss additional applications to consumption, investment, and asset prices