Advanced Search
MyIDEAS: Login to save this article or follow this journal

Inflation expectations and macroeconomic dynamics: The case of rational versus extrapolative expectations

Contents:

Author Info

  • Lines, Marji
  • Westerhoff, Frank

Abstract

The motivation of this paper is to understand the effects of coupling a macroeconomic model of inflation rate dynamics, relying on an aggregate expectation, to a heterogeneous expectations framework. A standard model composed of Okun's law, an expectations-augmented Phillips curve and an aggregate demand relation is extended to allow agents to select between trend-following and rational expectations to predict the future inflation rate. Using a mixture of analytical and numerical tools we investigate the model's dynamics and discuss the conditions under which the extended model leads to endogenous fluctuations in macroeconomic variables. Some preliminary results are offered for the case in which a Taylor-like monetary policy rule is included in the model.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V85-4XBR4HC-1/2/023315d4b274e1aa5e39bc975f5d9371
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 2 (February)
Pages: 246-257

as in new window
Handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:246-257

Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Heterogeneous expectations Expectation formation Dynamic macroeconomics Okun's law and Phillips curve Nonlinearities and chaos Bifurcations Intermittency;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers 9721, Centro de Estudios Monetarios Y Financieros-.
  2. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
  3. Bill Branch & George W. Evans, 2003. "Intrinsic Heterogeneity in Expectation Formation," University of Oregon Economics Department Working Papers 2003-32, University of Oregon Economics Department, revised 04 Oct 2004.
  4. Mankiw, N. Gregory & Reis, Ricardo & Wolfers, Justin, 2003. "Disagreement about Inflation Expectations," Research Papers 1807, Stanford University, Graduate School of Business.
  5. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  6. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, Elsevier.
  7. Chavas, Jean-Paul, 2000. "On information and market dynamics: The case of the U.S. beef market," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 833-853, June.
  8. Florian Wagener & Jan Tuinstra, 2004. "On Learning Equilibria," Computing in Economics and Finance 2004 217, Society for Computational Economics.
  9. Peter Boswijk & Cars H. Hommes & Sebastiano Manzan, 2005. "Behavioral Heterogeneity in Stock Prices," Tinbergen Institute Discussion Papers 05-052/1, Tinbergen Institute.
  10. Jan Tuinstra & Joep Sonnemans & Cars Hommes & Peter Heemeijer, 2006. "Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation," Working Papers wp06-18, Warwick Business School, Finance Group.
  11. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July.
  12. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  13. repec:att:wimass:9530 is not listed on IDEAS
  14. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
  15. De Grauwe, Paul, 2008. "DSGE-Modelling: when agents are imperfectly informed," Working Paper Series 0897, European Central Bank.
  16. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
  17. Frank H. Westerhoff, 2006. "Business Cycles, Heuristic Expectation Formation, and Contracyclical Policies," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(5), pages 821-838, December.
  18. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  19. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  20. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  21. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Society for Computational Economics, vol. 26(1), pages 19-49, August.
  22. Frank Westerhoff, 2006. "Samuelson's multiplier-accelerator model revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 13(2), pages 89-92.
  23. Baak, Saang Joon, 1999. "Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1517-1543, September.
  24. Westerhoff Frank H. & Reitz Stefan, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 7(4), pages 1-15, December.
  25. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Bifurcation Routes to Volatility Clustering under Evolutionary Learning," CeNDEF Working Papers 03-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  26. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
  27. Anufriev, M. & Assenza, T. & Hommes, C.H. & Massaro, D., 2008. "Interest Rate Rules with Heterogeneous Expectations," CeNDEF Working Papers 08-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  28. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  29. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2004. "Coordination of Expectations in Asset Pricing Experiments," DNB Staff Reports (discontinued) 119, Netherlands Central Bank.
  30. Farebrother, R W, 1973. "Simplified Samuelson Conditions for Cubic and Quartic Equations," The Manchester School of Economic & Social Studies, University of Manchester, vol. 41(4), pages 396-400, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Lines, Marji & Westerhoff, Frank, 2009. "Effects of inflation expectations on macroeconomic dynamics: Extrapolative versus regressive expectations," BERG Working Paper Series 68, Bamberg University, Bamberg Economic Research Group.
  2. Foroni, Ilaria & Agliari, Anna, 2011. "Complex dynamics associated with the appearance/disappearance of invariant closed curves," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(8), pages 1640-1655.
  3. Sordi, Serena & Vercelli, Alessandro, 2012. "Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 544-557.
  4. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  5. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2011. "The dynamic behaviour of asset prices in disequilibrium: a survey," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 101-139.
  6. Tiziana Assenza & William Brock & Cars Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," DISCE - Working Papers del Dipartimento di Economia e Finanza def7, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  7. Westerhoff, Frank & Franke, Reiner, 2012. "Agent-based models for economic policy design: Two illustrative examples," BERG Working Paper Series 88, Bamberg University, Bamberg Economic Research Group.
  8. Michael Wegener & Frank Westerhoff, 2012. "Evolutionary competition between prediction rules and the emergence of business cycles within Metzler’s inventory model," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 251-273, April.
  9. Heemeijer Peter & Hommes Cars & Sonnemans Joep & Tuinstra Jan, 2012. "An Experimental Study on Expectations and Learning in Overlapping Generations Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-49, October.
  10. Wenli Cheng & Simon D. Angus, 2012. "The Cantillon Effect of Money Injection through Deficit Spending," Development Research Unit Working Paper Series 12-12, Monash University, Department of Economics.
  11. Assenza, T. & Brock, W.A. & Hommes, C.H., 2012. "Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises," CeNDEF Working Papers 12-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:246-257. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.