Discussion paper

DP16141 Short-term Planning, Monetary Policy, and Macroeconomic Persistence

This paper estimates a behavioral New Keynesian (NK) model in which households and firms
plan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versions
of the NK model as well as other behavioral NK models. In the FH model, households and
firms are forward-looking in thinking about events over their planning horizon but are backward
looking regarding events beyond that point. This gives rise to substantial aggregate persistence
without resorting to additional features such as habit persistence and price contracts indexed
to lagged inflation.


López-Salido, J, C Gust and E Herbst (2021), ‘DP16141 Short-term Planning, Monetary Policy, and Macroeconomic Persistence‘, CEPR Discussion Paper No. 16141. CEPR Press, Paris & London. https://cepr.org/publications/dp16141