Estimating a Behavioral New Keynesian Model

TL;DR

This paper investigates how to identify and estimate a behavioral New Keynesian model, focusing on the cognitive discounting parameter, using robust likelihood-based methods to address identification challenges.

Contribution

It introduces identification-robust estimation techniques for a behavioral New Keynesian model and clarifies conditions for identifying the cognitive discounting parameter.

Findings

Identification-robust confidence sets confirm the importance of the cognitive discounting parameter.

Analytical solutions specify conditions for parameter identification.

Robust estimation methods improve the reliability of behavioral model estimates.

Abstract

This paper analyzes identification issues of a behavorial New Keynesian model and estimates it using likelihood-based and limited-information methods with identification-robust confidence sets. The model presents some of the same difficulties that exist in simple benchmark DSGE models, but the analytical solution is able to indicate in what conditions the cognitive discounting parameter (attention to the future) can be identified and the robust estimation methods is able to confirm its importance for explaining the proposed behavioral model.