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Bank of England: Why Imperfect Expectations Improve Our Economic Models (Explained)
This episode unpacks a Bank of England staff working paper by Jamie Lenney and Biagio Rosso, exploring how economic models can better reflect real-world human behavior. We dive into a new flexible approach that moves beyond traditional rational expectations, allowing for agents to overreact or underreact to economic conditions and news. Learn how incorporating these 'behavioural expectations' significantly improves the empirical fit of macroeconomic models, especially when forecasting inflation. We welcome your thoughts at feedback@econpod.org, and you can find the full paper at…
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