Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model

I consider a New Keynesian framework where agents combine mis-specified forecasts and myopia to form expectations. This combination is consistent with inflation forecasts' late overshooting, underreaction to forecast revisions, and overreaction to current inflation. Estimating the general equilibrium model on macroeconomic data shows that: (i) data favor combining autoregressive mis-specified forecasting rules with myopia over other alternatives; (ii) learning of mis-specified rules improves model fit; and (iii) mis-specified forecasts generate substantial internal persistence and amplification to exogenous shocks. Inflation expectations simulated from the best-fitting model closely match survey data, providing external validation for the proposed expectations formation process. (JEL D84, E12, E17, E21, E23, E31, E37)