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What Are In‡ation Expectations Rational?

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Author Info
David Andolfatto (Simon Fraser University, Canada and The Rimini Centre for Economics Analysis, Italy.)
Scott Hendry (Bank of Canada, Canada)
Kevin Moran () (UniversitŽ Laval, Canada)

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Abstract

Several recent papers report evidence of an apparent statistical bias in in‡ation expectations and interpret these …ndings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of in‡ation and in‡ation expectations over sample periods corresponding to those tests performed on actual data and …nd evidence of an apparent bias in in‡ation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.

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Publisher Info
Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number 27-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:27-07

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Related research
Keywords: Regime changes Learning dynamics Monte Carlo exp eriments Sample size.

Find related papers by JEL classification:
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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This page was last updated on 2008-9-26.

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