Abstract:

This paper examines the deviations in human behavior from the traditional economic hypothesis of homo economicus, integrating insights from behavioral economics and psychology. The motivation for this study stems from the need to enhance the understanding of macroeconomic dynamics by incorporating behavioral elements, particularly as they relate to expectation formation and market sentiment. Using the Neo-Keynesian behavioral model proposed by De Grauwe (2012, 2019), calibrated using parameters estimated by Jang and Sacht (2016), this research finds that this behavioral model captures more accurately the observed empirical dynamics of the output gap and inflation rates in the Eurozone and Central and Eastern European countries compared to traditional models with rational expectations. The results demonstrate the presence of non-normal distributions in the output gap and significant serial correlation in both the inflation rate and output gap, suggesting that market sentiment, as represented by an animal spirit index, plays a crucial role in economic fluctuations.