What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a...

Monetary responses to financial stress have recently become an important issue in macroeconomic and policy discussions in the USA as well as in the EU. In this paper, the authors study two regimes of monetary responses. While the fundamentals of an economy are assumed to have a long-run...