Submission Date

4-28-2014

Document Type

Paper

Department

Business & Economics

Second Department

Mathematics

Adviser

Eric Gaus

Second Adviser

Mohammed Yahdi

Committee Member

Eric Gaus

Committee Member

Talia Argondezzi

Committee Member

Akshaye Dhawan

Department Chair

Jennifer VanGilder

Department Chair

Mohammed Yahdi

External Reviewer

Paul Shea

Distinguished Honors

This paper has met the requirements for Distinguished Honors

Project Description

This paper is a two-dimensional analysis of agent behavior in a standard New Keynesian (NK) Macroeconomic model. On the dimension of pure mathematics, we analyze the parameters of the NK model and of possible prediction rules. On the other dimension we continue a practice of empirical study of heterogeneous expectations with an experiment. The experiment will ask participants to make predictions of future output and inflation. Their responses will create a data-set upon which analysis will be performed to illuminate and corroborate current theories of economic decision making. The literature has shown that most agents' forecasting rules can be modeled by basic linear formulae. We conclude that some subject's predictions are consistent with recursively updating coefficient models, while others still use more inscrutable methods. Despite this, and regardless of which model fit them best, the subjects' errors were all of similar magnitudes.

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