Behavioral new Keynesian models : a literature review

Abstract

The present paper tries to fill the gap of a missing up-to-date literature review of the most vanguard Behavioral New Keynesian (BNK) macroeconomic models. BNK models differ from traditional New Keynesian (NK) models insofar, as they challenge the notion of fully rational expectations of economic agents and introduce some kind of bounded rationality in the model. The models reviewed include Adaptive Learning by De Grauwe (2012), Level K by Mauersberger et al. (2020) and Sparse Dynamics by Gabaix (2019). The paper especially highlights different implications for monetary policy by critically comparing the heterodox BNK models to a standard version of the mainstream NK model. In doing so, it detects so far unidentified links and gaps in the current literature.