Disinflationary Boom Reversion

Recent emphasis has been placed on exploring behavioral aspects of individual agents in explaining macroeconomic phenomena. Of particular interest is augmenting New Keynesian models to produce costly disinflation, as empirics and consensus suggest. We presume a fraction of agents using rule-of-thumb behavior in price setting in an otherwise standard New Keynesian model. Our findings suggest that relatively small amounts of rule-of-thumb behavior are required to offset the net effects of Ball's disinflationary boom. Moderate levels of rule-of-thumb behavior can produce delayed recessions consistent with some VAR evidence. However, high proportions of rule-of-thumb behavior are needed to produce immediate reductions in output following implementation.