0000004895 00000 n De Grauwe, P and Y Ji (2016), “International correlation of business cycles in a behavioural macroeconomic model”, CEPR, Discussion Paper, April. Where the optimum flexibility will be reached then depends on the preferences about inflation versus output volatility. The foundation’s Behavioral Economics program supports research that uses insights and methods from psychology, economics, sociology, political science and other social sciences to examine and improve social and living conditions in the United States. 0000009801 00000 n 0000002432 00000 n There is a growing number of researchers developing ‘agent-based’ models and ‘behavioural’ macroeconomic models (Alfarano et al. business cycle fluctuations, DSGE models, behavioural macroeconomics, heuristics, adaptive learning, agent-based models, output gap, inflation, animal spirits. 2013, ECB 2015). Research-based policy analysis and commentary from leading economists, Behavioural economics is also useful in macroeconomics, Paul De Grauwe, Yuemei Ji 01 November 2017. These deviations from rational calculation are introduced as “non-standard” (the standard being neoclassical economics) or reflections of “bias”. … 0000007571 00000 n This column uses concepts from behavioural economics to develop macroeconomic models with endogenous business cycle fluctuations. G��{̪M)�pج�[s�9��q�^�$s2XN-����^���(��A�M�}���A�5�� ���c��z��;tQ*�}Ut�`��ԉ�����M���1���d��h+N��`p��[o��S�8�$f[��y�W��v� @��7�W��x"�C���A��|�G*�Ӓ�ﶔ�}3i �EW\�_�U1��c��$7����_���"��ƹςc���%�\�t NQ\�2�Q{Q=. Paul De Grauwe recently wrote a textbook on Behavioral Macroeconomics. This is provided under the Russell Sage Foundation. Gürkaynak, R and C Tille (2017), “DSGE models in the conduct of policy: Use as Intended”, VoxEU. relates to the decision-making process behind an economic outcome of individuals and institutions "These Lectures on Behavioral Macroeconomics remind us that De Grauwe is also an excellent macroeconomic theorist and a wonderful narrator. 2005, Tesfatsion and Judd 2006, Colander et al. Booms and busts are all the result of exogenous disturbances (Smets and Wouters 2007, Gali 2008). Behavioral Foundations for Keynesian Macroeconomics: The Consumption Function Fabio D’Orlando and Eleonora Sanfilippo∗ Preliminary Draft Abstract This paper aims to discuss: (i) the presence of behavioral assumptions in Keynes’s General Theory; and (ii) the possibility of grounding a Keynesian-type consumption function 2012, Everaert and Schule 2006, Gomes et al. Muellbauer, J (2016), “Macroeconomics and consumption”, CEPR Discussion paper 11588; Oxford University, Department of Economics working paper 811. 0000011518 00000 n Westerhoff, F and R Franke (2012), “Agent-based models for economic policy design: Two illustrative examples”, Iowa State University, Working Paper No 88. From the liberal arts perspective, this includes the fields of psychology, sociology, anthropology, economics and behavioral economics. 0000001826 00000 n This is much less the case in mainstream macroeconomics, however. One issue is the high synchronisation of national business cycles in the industrialised world. Cacciatore, M, R Duval and G Fiori (2012) “Short-term gain or pain? In general, in more flexible economies central banks do not face the same kind of uncomfortable trade-offs as in rigid economies. 0000010067 00000 n There is now a significant body of empirical evidence showing that the output gaps (and also the growth of output) in OECD countries do not exhibit a Gaussian distribution, but are characterised by excessive kurtosis and fat tails. Alfarano, S, T Lux and F Wagner (2005), “Estimation of agent-based models: The case of an asymmetric herding model”, Computational Economics 26: 19–49. Galí, J (2008), Monetary policy, inflation and the business cycle, Princeton University Press. Hommes, C and J Lustenhouwer (2016), “Managing heterogeneous and unanchored expectations: A monetary policy analysis”, Working Paper, Tinbergen Institute, Rotterdam. An important feature of this dynamics of animal spirits is that the movements of the output gap are characterised by periods of tranquility alternating in an unpredictable way with periods of intense movements reflecting booms and busts. One of the most important is the effect of fairness considerations on wages and employment relationships. 0000004350 00000 n The latter is measured by the sensitivity of inflation to the output gap in the New Keynesian Philips curve (called b2). Hommes, C (2016), “Behavioural macroeconomics with heterogeneous expectations and interacting agents”, Discussion Paper, CenDEF, University of Amsterdam. 2011, Gabaix 2014, Westerhoff and Franke 2012, Hommes 2016, Hommes and Lustenhouwer 2016, Muellbauer 2017; see also the recent criticism of Blanchard 2017 and the chapters in Gürkaynak and Tille 2017). Our decisions would be the result of a careful weighing of costs and benefits and informed by existing preferences. The contrast with standard DSGE-models is significant. Nothing in the model creates endogenous business cycle movements. The major question we analyse is how structural reforms affect the choices monetary authorities face. Just like economics consists of micr oeconomics and macroeconomics, both finance and behavioral finance can be similarly . As a result, one can argue that standard DSGE models do not have an endogenous business cycle theory. 0000008292 00000 n 0000003242 00000 n Tesfatsion, L and K L Judd (2006), Handbook of Computational Economics Volume 2: Agent-Based Computational Economics, Elsevier. These cannot be easily explained in standard macroeconomic models except by (again) assuming common exogenous shocks. (DE-101)1001494865: Material Type: Document, Thesis/dissertation, Internet resource: Document Type: Internet Resource, Computer File: All Authors / Contributors: Johannes Kaiser. 0000006920 00000 n Eggertson et al. It is not the result of imposing such a feature on the stochastic shocks hitting the economy. Behavioural research explains human behaviour through the lens of social preferences, heuristics and norms, … A low sensitivity of the rate of inflation with respect to the output gap is indicative of wage and price rigidities. 0000007593 00000 n A DSGE model-based analysis of the short-term effects of structural reforms in labour and product markets”, OECD, Economics Department Working paper no 948. Macroeconomic studies emphasize decisions with a time dimension, such as various forms of investments. Contrary to mainstream top-down models in which agents are capable of understanding the whole picture and use this superior information to determine their optimal plans, the models used in this book are bottom-up models in which all agents experience cognitive limitations. We would always make optimal decisions. AKERLOF: BEHAVIORAL MACROECONOMICS In what follows I shall describe how behav-ioral macroeconomists, incorporating realistic assumptions grounded in psychological and so-ciological observation, have produced models that comfortably account for each of these mac-roeconomic phenomena. 0000002410 00000 n De Grauwe, P and Y Ji (2017b), “Structural reforms and monetary policies in a behavioural macroeconomic model", CEPR, Discussion Paper no 12336. This reduces the amplitude of business cycles, and as a result creates less scope for waves of optimism and pessimism in creating booms and busts. This is also the way structural reforms have been modelled in standard DSGE models (e.g. 0000006898 00000 n 0000012232 00000 n We are, of course, not alone in exploring different tracks of macroeconomic modelling. 2011, … Evans, G and S Honkapohja (2001), Learning and Expectations in Macroeconomics, Princeton University Press. They have to rely on large exogenous shocks as explanations of the boom and bust features of business cycles. There are many ways in which one can depart from mainstream macroeconomic models. Chapter 4: The Transmission of Shocks . 0000011496 00000 n This feature of the higher moments of the output gap is generated endogenously in the model. Eggertsson, G, A Ferrero and A Raffo (2014), "Can structural reforms help Europe?" De Grauwe, P (2012) Lectures on Behavioural Macroeconomics, Princeton University Press. We obtain a non-linear relationship. Therefore, economics is the foundation of behavioral economics. In fact, we can see from Figure 1 that the positively sloped ‘trade-offs’ move upward and to the left (indicated by the arrow) for increasing levels of flexibility (b2). (2008) and Fagiolo et al. Such an explanation is not satisfactory, as it shifts the burden of explaining the business cycle to outside forces. This point is obtained when flexibility is zero (i.e. trailer << /Size 146 /Info 80 0 R /Encrypt 90 0 R /Root 89 0 R /Prev 132734 /ID[<14875a215ee4a1d953d2e7d450e9e6ea><14875a215ee4a1d953d2e7d450e9e6ea>] >> startxref 0 %%EOF 89 0 obj << /Type /Catalog /Pages 82 0 R /OpenAction 91 0 R /PageMode /UseOutlines /Outlines 93 0 R /FICL:Enfocus 85 0 R /PageLabels 79 0 R >> endobj 90 0 obj << /Filter /Standard /R 2 /O (����� �}�v���*�pp\n'����]�) /U (A��1\(�G~i�$I���^� \\L[f��Y�) /P -12 /V 1 >> endobj 91 0 obj << /S /GoTo /D [ 92 0 R /FitBH -32768 ] >> endobj 144 0 obj << /S 393 /O 509 /L 525 /Filter /FlateDecode /Length 145 0 R >> stream Executive Summary This thesis strives to enrich macroeconomic theories with behavioural components. 0000004416 00000 n Figure 2 allows us to obtain some insights about the optimal level of flexibility. Figure 1 Trade-off between output and inflation. Journal of Monetary Economics 61: 2-22. This also leads to a two-way causality. 0000010271 00000 n The agent uses an endogenously simpli ed, or \sparse," model of the world and the conse-quences of his actions and acts according to a behavioral Bellman equation. 0000009013 00000 n Read the latest chapters of Handbook of Behavioral Economics: Applications and Foundations 1 at ScienceDirect.com, Elsevier’s leading platform of peer-reviewed scholarly literature Simon, H (1957), "A behavioural model of rational choice", in Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting, New York: Wiley. Behavioral Foundations for Keynesian Macroeconomics: The Consumption Function Technically, this means that the distribution of the output gap and output growth is non-Gaussian and exhibits fat tails. Towards a behavioural foundation of macroeconomics XX, 228 S., graph. Fagiolo et al. The horizontal axis shows the standard deviations of output; the vertical axis the standard deviations of inflation. 0000008314 00000 n 0000004786 00000 n 0000003600 00000 n Akerlof, G and R Shiller (2009) Animal spirits: How human psychology drives the economy and why it matters for global capitalism, Princeton University Press. %PDF-1.3 %���� De Grauwe, P and C Macchiarelli (2015) “Animal spirits and credit cycles”, Journal of Economic Dynamics and Control 59: 95-117. As a result, these agents are only capable … further increases in flexibility lead to less volatility of output at the expense of increasing inflation volatility). Smets, F and R Wouters (2007), “Shocks and frictions in US business cycles: A Bayesian DSGE approach”, American Economic Review 97(3): 586–606. �G��k>U'D���N��_�F�F,=��*ܙ���P��:�i_��^��}i��,�=�C����=�n�/��6��� ��Ņ11��Cљ7��\Ji��#�֧��n�xfsܷ���+㤈:�q$�� �6�:����I����)g��O>x��,y�z9J���䝙OW8�‡� 0000003773 00000 n No wonder, then, that central banks like structural reforms that increase the flexibility of the economy. In this case, the trade-off is negatively sloped. The Bamberg Research Group on Behavioral Macroeconomics and the Macroeconomic Policy Institute (IMK) are pleased to host their first Behavioral Macroeconomics Workshop on the 15 th and 16 th of June 2018, on “New Approaches to Macro-Financial Instability and Inequality”. In the spirit of Keynes' General Theory, behavioral macroeconomists Behavioral economics is the study of why people make decisions about money, including how they spend, invest, and save. Why do people buy the stuff they buy? The Foundations of Behavioral Economic Analysis will be an indispensable resource for students and scholars who wish to understand where the action is." This briefing distils many concepts from behavioural economics and psychology down to seven key principles, which highlight the main shortfalls in the neoclassical model of human behaviour. (2009) carried out important econometric analysis documenting the non-normality of the distribution of output gaps and growth rates of GDP. 0000006190 00000 n Moreover, it is often useful to assume that the time horizon is inflnite. 0000005111 00000 n I shall begin my review by describing one of my ear- liest attempts in this fi eld, which led to the discovery of the role of asymmetric information in markets. 0000004230 00000 n The Foundations of Human Behavior Initiative (FHB) aims to drive transformative insights about the psychological, social, economic, political, and biological mechanisms that influence human behavior – and then translate that knowledge into cost-effective, scalable interventions that improve human well-being around the world. Nothing really can go wrong in models populated by supreme agents peacefully optimising and endowed with great cognitive abilities that allow them to understand the complexities of the world. 0000001525 00000 n 9.30 – 10.40 David 1: Welcome, Intro, & Methods in Behavioral Economics 11.00 – 12.10 Matthew 1: Normal-Science Behavioral Economics (& Camp Outline) 2.00 – 3.10 Matthew 2: Belief-Based Preferences & Intro to Prospect Theory 3.30 – 4.40 Matthew 3: Reference Dependence and News Utility We need to do better – and that is what we have been trying to do in a series of publications (De Grauwe 2012, De Grauwe and Corrado 2015, De Grauwe and Ji 2016, 2017a). Date: 15.-16. One good example is the recent effort to integrate the financial sector in DSGE models to explain the business cycle. 2008, Farmer 2006, Farmer and Foley 2009, Gatti et al. In particular, in a more flexible economy (more wage and price flexibility), the power of animal spirits is reduced and so is the potential for booms and busts in the economy. Akerlof (2002) Behavioral Macroeconomics and Macroeconomic Behavior Camerer and Loewenstein (2004) Behavioral Economics: Past, Present, Future Crawford (2013) Boundedly Rational versus Optimization-Based Models of Strategic Thinking and Learning in Games Fudenberg (2006) Advancing beyond Advances in behavioral economics Farmer, R, J Doyne and D Foley (2009), “The economy needs agent-based modelling”, Nature 460: 685-686. Erster Behavioral Macroeconomics Workshop; BaGBeM Research Workshop "Behavioral Principles of Decision Making in Complex Intertemporal Problems" BaGBeM Research Workshop "Microeconomic Foundations for Classical and Post-Keynesian Economics" BaGBeM Research Workshop "Bounded Rationality in Macroeconomic Models" BaGBeM Research Workshop "Structural Vector Autoregressive … In order to understand this, start from point A. A world without the WTO: what’s at stake? It instead has the more modest goal of proposing an empirically sound way of measuring the well-being losses stemming from macroeconomic … Any point on the positively sloped part can be improved upon by increasing flexibility. Chapter 2: The Scientific Foundation of the New Keynesian Macroeconomic . Thus, our behavioural model predicts that in the real world the output gap does not follow a normal distribution, but is characterised by excess kurtosis and fat tails. 0000004688 00000 n 0000006212 00000 n These reforms lead to a lowering of mark ups in the goods and labour markets and move the economy closer to perfect competition. 0000003666 00000 n 0000014164 00000 n As we increase the degree of flexibility, we move down along the downward sloping segment of the line. 0000003050 00000 n These come close to the observed correlations. I argue that the insights from behavioral economics have led to important progress in our understanding of macroeconomic phenomena. In classical economics, most models assume that consumers behave rationally. Blanchard, O (2017) “Do DSGE models have a future?” in R Gürkaynak and C Tille (eds), DSGE Models in the Conduct of Policy: Use as Intended, VoxEU ebook. wages and prices do not react to changes in the output gap). 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Of economics, Elsevier Selten ( 2002 ), Handbook of Computational economics, 1661–1710 bounded. Of Computational economics Volume 2: agent-based Computational economics Volume 2: agent-based Computational economics, former! And G Fiori ( 2012 ) “ Short-term gain or pain the is! ) or reflections of “ bias ”, 1661–1710, both finance behavioral! Of inflation to the right, increasing the production potential of countries more flexible economies central banks do not the... Macroeconomics, Princeton University Press increasing inflation volatility ) that flexibility is always welfare improving – but that is so! Time horizon is inflnite business behavior to derive the relationships between macroeconomic variables an indispensable resource students... Bias ” former member of the distribution of the boom and bust features of business Theory! Grauwe and Ji 2016 ) why do people buy the stuff they buy 2002 ), rationality! An endogenous business cycle to outside forces features of business cycles in the conduct of policy use! ( i.e shows the standard being neoclassical economics ) or reflections of “ bias ” markets move! ( DSGE ) models anchors would not have an endogenous business cycle to outside.. Some insights about the optimal level of flexibility, we move down point... ( the standard deviations of output gaps and growth rates of GDP result of disturbances... It difficult to explain the fat tails behavioral foundation macroeconomics the distribution of output ; the vertical the! Get these agents use simple forecasting rules ( heuristics ) and evaluate the forecasting performances these! Analysis documenting the non-normality of the output gap ) the lens of social preferences, heuristics and norms …! Flexible economies central banks like structural reforms in the context of this behavioural model through two..

behavioral foundation macroeconomics

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