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Inferential Expectations

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  • Gordon D. Menzies

    ()

  • Daniel John Zizzo

Abstract

We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Rational expectations are shown to be a special (limiting) case of inferential expectations, with the test size alpha becoming a metric for rationality. We present the results of an experiment that supports inferential expectations. When inferential expectations are built into a Dornbusch-style model of the exchange rate, regression tests of Uncovered Interest Parity and the rational expectations version of the term structure both display downward bias in the slope coefficient.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2005-12.

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Length: 42 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:een:camaaa:2005-12

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References

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  1. Beckman, Steven R. & Downs, David, 1997. "Forecasters as imperfect information processors: Experimental and survey evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 89-100, January.
  2. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  3. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
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  25. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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Citations

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Cited by:
  1. Timo Henckel & Gordon D. Menzies & Nick Prokhovnik & Daniel J. Zizzo, 2010. "Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations," CAMA Working Papers 2010-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Bruce Lyons & Gordon Menzies & Daniel Zizzo, 2012. "Conflicting evidence and decisions by agency professionals: an experimental test in the context of merger regulation," Theory and Decision, Springer, vol. 73(3), pages 465-499, September.
  3. Bruce Lyons & Gordon Douglas Menzies & Daniel John Zizzo, 2009. "Professional interpretation of the standard of proof: An experimental test on merger regulation," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 09-16, School of Economics, University of East Anglia, Norwich, UK..
  4. Monica Correa-Lopez & George Choullarakis, 2012. "A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions," Working Papers 1203, BBVA Bank, Economic Research Department.
  5. Gordon Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," Research Paper Series 159, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Gordon Menzies & Daniel Zizzo, 2008. "News And Expectations In Financial Markets: An Experimental Study," CAMA Working Papers 2008-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Menzies, Gordon D. & Zizzo, Daniel John, 2012. "Monetary policy and inferential expectations of exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 359-380.
  8. Gordon Menzies & Daniel Zizzo, 2006. "Exchange Rate Markets And Conservative Inferential Expectations," CAMA Working Papers 2007-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Timo Henckel & Gordon D. Menzies & Daniel J. Zizzo, 2010. "Threshold Pricing in a Noisy World," CAMA Working Papers 2010-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Easaw Joshy & Golinelli Roberto, 2010. "Households Forming Inflation Expectations: Active and Passive Absorption Rates," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, November.
  11. Timo Henckel & Gordon Menzies & Daniel Zizzo, 2010. "Inferential Expectations and the Missing Middle of Price Changes," University of East Anglia Applied and Financial Economics Working Paper Series 008, School of Economics, University of East Anglia, Norwich, UK..

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