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  4. October 2022
  5. Short-Term Planning, Monetary Policy, and Macroeconomic Persistence

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Short-Term Planning, Monetary Policy, and Macroeconomic Persistence

  • Christopher Gust
  • Edward Herbst
  • David López-Salido
American Economic Journal: Macroeconomics
vol. 14, no. 4, October 2022
(pp. 174–209)
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Abstract

We estimate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon planning (FHP) model outperforms rational expectations versions of the NK model as well as other behavioral NK models. In the FHP model, households and firms are forward-looking in thinking about events over their planning horizon but are backward-looking regarding events beyond that point. This gives rise to substantial aggregate persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation.

Citation

Gust, Christopher, Edward Herbst, and David López-Salido. 2022. "Short-Term Planning, Monetary Policy, and Macroeconomic Persistence." American Economic Journal: Macroeconomics, 14 (4): 174–209. DOI: 10.1257/mac.20200058

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
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