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Title:Identification of animal spirits in a bounded rationality model: An application to the euro area PDF Logo
Authors:Jang, Tae-Seok
Sacht, Stephen
Issue Date:2012
Series/Report no.:Economics Working Paper, Christian-Albrechts-Universität Kiel, Department of Economics 2012-12
Abstract:In this paper we empirically examine a heterogeneous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements of the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides a reasonable fit to auto- and cross-covariances of the data. This result is mainly driven by a high degree of intrinsic persistence in the output and inflation gap due to the impact of animal spirits on economic dynamics. Further, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Finally, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap.
Subjects:Animal Spirits
Bounded Rationality
Discrete Choice Theory
Euro Area
New-Keynesian Model
Simulated Method of Moments
JEL:C53
D83
E12
E32
Document Type:Working Paper
Appears in Collections:Economics Working Papers, Department of Economics, CAU Kiel

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