Bounded rationality in Keynesian beauty contests: a lesson for central bankers?
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- dc.contributor.author Mauersberger, Felix
- dc.contributor.author Nagel, Rosemarie
- dc.contributor.author Bühren, Christoph
- dc.date.accessioned 2020-07-23T10:58:24Z
- dc.date.available 2020-07-23T10:58:24Z
- dc.date.issued 2020
- dc.description.abstract The great recession (2008) triggered an apparent discrepancy between empirical findings and macroeconomic models based on rational expectations alone. This gap led to a series of recent developments of a behavioral microfoundation of macroeconomics combined with the underlying experimental and behavioral Beauty Contest (BC) literature, which the authors review in this paper. They introduce the reader to variations of the Keynesian Beauty Contest (Keynes, The general theory of employment, interest, and money, 1936), theoretically and experimentally, demonstrating systematic patterns of out-of-equilibrium behavior. This divergence of (benchmark) solutions and bounded rationality observed in human behavior has been resolved through stepwise reasoning, the so-called level k, or cognitive hierarchy models. Furthermore, the authors show how the generalized BC function with limited parameter specifications encompasses relevant micro and macro models. Therefore, the stepwise reasoning models emerge naturally as building blocks for new behavioral macroeconomic theories to understand puzzles like the lacking rise of inflation after the financial crisis, the efficacy of quantitative easing, the forward guidance puzzle, and the effectiveness of temporary fiscal expansion.
- dc.description.sponsorship Nagel also acknowledges the grants PGC2018-098949-B-I00 from the Ministry of Education Madrid, and the travel grant Salvador de Madariaga 2019.
- dc.format.mimetype application/pdf
- dc.identifier.citation Mauersberger F, Nagel R, Bühren C. Bounded rationality in Keynesian beauty contests: a lesson for central bankers? Economics. 2020 Jun 04;14(2020-16):1-38. DOI: 10.5018/economics-ejournal.ja.2020-16
- dc.identifier.doi http://dx.doi.org/10.5018/economics-ejournal.ja.2020-16
- dc.identifier.issn 1864-6042
- dc.identifier.uri http://hdl.handle.net/10230/45169
- dc.language.iso eng
- dc.publisher European Mathematical Society
- dc.relation.ispartof Economics. 2020 Jun 04;14(2020-16):1-38
- dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/PGC2018-098949-B-I00
- dc.rights © Author(s) 2020. Licensed under the Creative Commons License - Attribution 4.0 International (CC BY 4.0).
- dc.rights.accessRights info:eu-repo/semantics/openAccess
- dc.rights.uri https://creativecommons.org/licenses/by/4.0/
- dc.subject.keyword Beauty Contest game
- dc.subject.keyword Expectation formation
- dc.subject.keyword Equilibration
- dc.subject.keyword Level k reasoning
- dc.subject.keyword Behavioral macroeconomics
- dc.subject.keyword Game theory
- dc.subject.keyword Experimental economics
- dc.title Bounded rationality in Keynesian beauty contests: a lesson for central bankers?
- dc.type info:eu-repo/semantics/article
- dc.type.version info:eu-repo/semantics/publishedVersion