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I am looking for some paper that tries to establish rigorous micro-foundations the behavioral New Keynesian (or any other) macro models.

This is surprisingly hard, most work on this topic (like De Grauwe 2012), simply starts already by setting up IS and LM curves and adding some sort of mix of rational and behavioral agents (mostly agents with non-rational expectations) on top of it. However, I can't find any paper that would provide full rigorous micro-foundations for such model (i.e. deriving IS and LM from the micro behavior of these rational and behavioral agents across time).

This is of course difficult, as without the rational expectations it is difficult to solve macro models, but on other hand it is hard to believe this issue would be ignored by the practitioners.

Consequently, my question is: are there any papers that establish rigorous micro-foundations for behavioral macro models?

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    $\begingroup$ I am currently working on such rigorous microfoundations myself, and looking to place them within my Master's thesis. Once I have a firm result I'll let you know. $\endgroup$
    – user28226
    Commented Aug 26, 2021 at 7:05
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    $\begingroup$ @S.IasonKoutsoulis interesting, sure let me know once you finish your masters thesis I would be interested to read it $\endgroup$
    – 1muflon1 ♦
    Commented Aug 26, 2021 at 8:16

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Gabaix, X. (2020). A behavioral New Keynesian model. American Economic Review, 110(8), 2271-2327. has microfoundation. And Gabaix has more papers that might interest you..

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I'd suggest you to read Vernon Smith's work on experimental economics (that is the application of experimental methods to study economic question also on an individual level); and also Kanheman (that is Smith's doctoral student)

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  • $\begingroup$ I am familiar with Smiths work on experiments; but I can’t recall any paper that would try to establish micro foundations for macro models, can you point me toward some specific work? $\endgroup$
    – 1muflon1 ♦
    Commented Aug 27, 2021 at 6:17
  • $\begingroup$ I'd suggest you "Rationality in Economics: constructivist and Ecological Forms". Since it describes how individual interact in a strategic-manner and the purpose is to demonstrate that even if there is a sort of "individual irrationality" there can be a systemic equilibriu, I think that is a good poin to start (at least with regard to consumer preferences and behavior) $\endgroup$
    – Giord
    Commented Aug 27, 2021 at 6:28
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    $\begingroup$ thanks I will have a look at it consider adding it to your answer $\endgroup$
    – 1muflon1 ♦
    Commented Aug 27, 2021 at 6:54
  • $\begingroup$ Is this a question about the foundations of one or more equilibrium models? I mean what if the solution to a math model for a realistic economic problem produces an outcome that we classify as chaotic, complex, and/or unstable? In a real economy the "sins" of the market and government agents, which limit the assumption of perfect rationality (ability to predict outcomes), are handled by social customs such as bankruptcy discharge of bad debts, government bailout of bank sector equity, etc. This is no longer a math model economy. It is math on the planning side and law on outcome side. $\endgroup$
    – SystemTheory
    Commented Aug 27, 2021 at 12:37

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