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Sustainability and Welfare Policy in European Market Economies

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Edited By Jürgen Plöhn and George Chobanov

The articles in this volume are selected from the contributions to two international conferences. Authors and teams tackle general economic approaches and developments with respect to new concepts for the production possibility frontier, the connection of development and exports diversification and improvements to the business process. Other contributors address economic sustainability with respect to an institutional path to sustainable growth, available financial instruments, behavioral models of economic expectations, solutions for waste treatment as well as to technological aspects related to security, privacy and IT governance. Finally, a third group of authors discusses health policy in the EU and postsecondary education in Bulgaria as aspects of public welfare.

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Behavioral Models of Economic Expectations as Foundations for Sustainable Macroeconomic Policy (Anton Gerunov)

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Anton Gerunov

(Sofia University “St. Kliment Ohridski”, Bulgaria)

Behavioral Models of Economic Expectations as Foundations for Sustainable Macroeconomic Policy

Abstract: Using survey data on inflation expectations for EU-27 over the period 1998–2013, this paper tests whether the time series conform to the Rational Expectations approach or the Heterogeneous Expectations one, based on behavioral characteristics of the agents. Econometric tests find more support for the latter view. Modeling expectations as heterogeneous ones produces more complex and indeterminate economic dynamics of both output and inflation in the standard DSGE framework. This has important implications for the conduct of macroeconomic policy.

Introduction

The history of formally modeling the economy has been a long and controversial one and has produced macroeconomic models with varying degrees of sophistication to aid policy (Mankiw 1990; 2006). It is only through models that the precise transmission mechanisms and ultimate quantitative effects of actions can be studied. The last two decades have seen the ascendance of Dynamic Stochastic General Equilibrium (DSGE) models, largely based on the rational optimizing behavior of representative agents exposed to random exogenous shocks (Gali 2008; Walsh 2003). This approach has become very influential and governments and central banks alike have made recourse to DSGE models to inform economic policy. The viability of this class of models was debated but their continued use for practical purposes continued nevertheless (Colander 2009).

The global economic crisis which started in 2007–2008 was a sobering experience,...

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