Beyond Rationality: Unveiling the Role of Animal Spirits and Inflation Extrapolation in Central Bank Communication of the US (2409.10938v2)

Abstract: Modern macroeconomic models, particularly those grounded in Rational Expectation Dynamic Stochastic General Equilibrium (DSGE), operate under the assumption of fully rational decision-making. This paper examines the impact of behavioral factors on the communication index/sentiment index of the US Federal Reserve. [Upon receiving the review comments, I found some technical errors in the paper. I shall update it accordingly. Please do not cite this paper without author's permission.]