Behavioral Macroeconomics: A Systematic Review for Policy Insights

Abstract

This article explores the evolution of Behavioral New Keynesian (BNK) models with a focus on non-rational, heterogeneous expectations and heuristic-based decision-making. By reviewing foundational frameworks from Brock and Hommes (1997) and De Grauwe (2012), to recent advancements by Hommes (2021) and De Grauwe and Ji (2024). The review highlights the critical role of cognitive limitations, animal spirits, and adaptive learning in shaping macroeconomic outcomes. A central focus is on policy applications, analyzing how behavioral macroeconomic models offer unique insights into forward guidance, inflation targeting, and fiscal interventions. In particular, it explores how these models address challenges like zero lower bound constraints and expectationdriven liquidity traps, emphasizing the importance of central bank credibility and institutional trust in stabilizing economic outcomes.