Persistence and Scarring in a Non-Linear New Keynesian Model with Experienced-Based-Expectations

Experienced-based-expectations allow the outcomes people experience to shape their views regarding future outcomes. We describe three forms of experienced-basedexpectations and show how they can be applied in general equilibrium. Using a non-linear new Keynesian model, we show that experienced-based-expectations lead to increased volatility and sustained persistence, akin to scarring. Periods of sustained bad outcomes, such as systematically low technology shocks, lead to persistently lower inflation. Changes in the inflation target have a greater effect on behavior when expectations are formed using outcomes on endogenous variables than when they are formed using outcomes on the shocks