Behavioral economics and macroeconomic models

Steinar Holden and John C. Driscoll

Photo: Elsevier

Published in:

Journal of Macroeconomics 2014 41 pp. 133-147



Over the past 20 years, macroeconomists have incorporated more and more results from behavioural economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modelling the economy—for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioural economics to improve some of the underpinnings of the New Keynesian model—specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioural economics features in macroeconomic model

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Published June 26, 2015 11:25 AM - Last modified June 26, 2015 11:26 AM