Essays in monetary policy, expectations formation, and heterogeneous agent models

In Chapter 1, coauthored with Jan Zemlicka, we analyze the optimal window length in the average inflation targeting rule within a Behavioral Heterogeneous Agent NK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window depends on the speed of return to the target path when myopia plays a bigger role. In Chapter 2, I disentangle assumptions behind the consumption response to changes in inflation expectations in the New Keynesian framework. While the standard New Keynesian model implies that higher households' inflation expectations strongly raise nominal wage expectations and generate a positive consumption response, empirical evidence shows low passthrough to nominal wage expectations and a mixed sign of the consumption response. I study representative agent and heterogeneous agent New Keynesian models that allow for this low passthrough, arising from myopic nominal wage expectations. In the representative agent model, consumption still increases because households receive profits that offset the expected decline in real wages. In contrast, in the heterogeneous agent model, the consumption response becomes negative when the profit channel is weakened and the disconnect between inflation and nominal wage expectations is sufficiently strong. In Chapter 3, I discuss how the aggregate uncertainty substantially affects the behavior of rational expectations equilibrium (REE) macroeconomic models. Utilizing the standard New Keynesian model with occasionally binding constraint, I show that the role of the uncertainty is extensively sidelined even with a slight deviation from the REE. It almost disappears when using empirically relevant expectations formation. When macroeconomists use empirically disciplined expectations formation, solution techniques that abstract from the uncertainty may not lose much compared to true rational expectation solutions that take the uncertainty into account.