Year: 2025
Type: article
Abstract: ABSTRACT Monetary policy transmission in the benchmark New Keynesian (NK) model hinges on the Full Information Rational Expectations (FIRE) assumption, especially via indirect general equilibrium (GE) effects. This paper relaxes FIRE by introducing noisy information into a Heterogeneous‐Agent NK model with financial frictions. Noisy information dampens amplification by muting GE effects, aligning model dynamics with empirical evidence, and resolving the forward guidance puzzle. It also broadens the determinacy region for policy rules. Finally, I explore belief shocks, showing that transitory “animal spirits” can have persistent effects, offering new insights into the macroeconomic consequences of information frictions.
Source: International Economic Review
DOI: 10.1111/iere.70007
Author: José‐Elías Gallegos
Institution: Bank of Spain
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4413239106