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Heterogeneity and learning in inflation expectation formation: an empirical assessment

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Author Info
Emiliano Santoro
Damjan Pfajfar ()

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Abstract

Relying on Michigan Survey's monthly micro data on inflation expectations we try to determine the main features - in terms of sources and degree of heterogeneity - of inflation expectation formation over different phases of the business cycle. Different learning rules have been applied to the data, in order to test whether agents are learning and whether their expectations are converging towards perfect foresight. Results suggest that behaviour of agents in the right hand side of the distribution is more associated with learning dynamics. Tests for "static" and "dynamic" versions of sticky information are also conducted. Only agents in the middle of the distribution are regularly updating their information sets. Evidence of rational inattention has been found for agents comprised in the upper end of the distribution. We identify three regions of the overall distribution corresponding to different expectation formation processes, which display a heterogeneous response to main macroeconomic indicators : a static or highly autoregressive (LHS) group, a "nearly" rational group (middle), and a group of agents (RHS) behaving in accordance to adaptive learning and sticky information. The latter, generally speaking, are too "pessimistic" as they overreact to macroeconomic fluctuations.

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Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 0607.

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Date of creation: 2006
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Handle: RePEc:trn:utwpde:0607

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Related research
Keywords: Heterogeneous Expectations Adaptive Learning Sticky Information Survey Expectations

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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