The Effect of Monetary Policy on Output According to BHANK

Abstract

The goal of this thesis is to study whether, and by how much, economic output is affected by monetary policy when agents are rational or behavioral through a Behavioral Heterogeneous Agent New Keynesian (BHANK) model. First, we present the behavioral new Keynesian (BNK) and traditional Heterogeneous Agent New Keynesian (HANK) models. Second, we introduce a myopia parameter to reflect how agents foresee future change in prices, dividends, and interest rates in BHANK. Third, we investigate the output deviation from its steady state response following a monetary policy shock, and quantify the results to assess how myopia impacts central bank policy effectiveness. Finally, we provide insight on possible policy ramifications.