A Behavioral New Keynesian Model

  title={A Behavioral New Keynesian Model},
  author={Xavier Gabaix},
This paper presents a framework for analyzing how bounded rationality a↵ects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, a↵ects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or “helicopter drops of… CONTINUE READING
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