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Experimental Evidence on Inflation Expectation Formation (Replaced by CentER DP 2011-091)

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Author Info

  • Pfajfar, D.
  • Zakelj, B.

    (Tilburg University, Center for Economic Research)

Abstract

Using laboratory experiments, we establish a number of stylized facts about the process of inflation expectation formation. Within a New Keynesian sticky price framework, we ask subjects to provide forecasts of inflation and their corresponding confidence bounds. We study individual responses and properties of the aggregate empirical distribution. Many subjects do not rely on a single model of expectation formation, but are rather switching between di¤erent models. About 40% of the subjects predominately use a rational rule when forecasting inflation and about 35% of agents simply extrapolate trend. Around 5% of subjects behave in an adaptive manner, while the remaining 20% behaves in accordance to adaptive learning and sticky information models. Furthermore, we find that subjects in only 60% of cases correctly perceive the underlying uncertainty in the economy when reporting confidence intervals. However, empirical analysis does not support a significant countercyclical behavior of individuals' confidence intervals.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2009-007.

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Date of creation: 2009
Date of revision:
Handle: RePEc:dgr:kubcen:2009007

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Web page: http://center.uvt.nl

Related research

Keywords: Inflation Expectations; Experiments; New Keynesian Model; Adaptive Learning;

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Cited by:
  1. Vivien Lewis & Agnieszka Markiewicz, 2009. "Model misspecification, learning and the exchange rate disconnect puzzle," Working Paper Research 168, National Bank of Belgium.
  2. Bao, T. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2010. "Individual Expectations, Limited Rationality and Aggregate Outcomes," CeNDEF Working Papers 10-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Pfajfar, Damjan & Santoro, Emiliano, 2010. "Heterogeneity, learning and information stickiness in inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 426-444, September.
  4. Hommes, Cars H., 2014. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," Review of Behavioral Economics, now publishers, vol. 1(1-2), pages 75-97, January.
  5. Kaushik Basuy & Leonardo Becchetti & Luca Stanca, 2008. "Experiments with the Traveler's Dilemma: Welfare, Strategic Choice and Implicit Collusion," Working Papers 147, University of Milano-Bicocca, Department of Economics, revised Oct 2008.
  6. Bottazzi, Giulio & Devetag, Giovanna & Pancotto, Francesca, 2011. "Does volatility matter? Expectations of price return and variability in an asset pricing experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 124-146, February.
  7. Luis Ricardo Maertens & Gabriel Rodríguez, 2012. "Inflation Expectations Formation In The Presence Of Policy Shifts And Structural Breaks: An Experimental Analysis," Documentos de Trabajo 2012-339, Departamento de Economía - Pontificia Universidad Católica del Perú.
  8. Graf Lambsdorff, Johann & Schubert, Manuel & Giamattei, Marcus, 2011. "On the role of heuristics: Experimental evidence on inflation dynamics," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-63-11, University of Passau, Faculty of Business and Economics.
  9. Georganas, Sotiris & Healy, Paul J. & Li, Nan, 2014. "Frequency bias in consumers׳ perceptions of inflation: An experimental study," European Economic Review, Elsevier, vol. 67(C), pages 144-158.

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