IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Effects of Inflation Expectations on Macroeconomic Dynamics: Extrapolative Versus Regressive Expectations

  • Lines Marji

    ()

    (University of Udine)

  • Westerhoff Frank

    ()

    (University of Bamberg)

In this paper, we integrate heterogeneous inflation expectations into a simple monetary model. Guided by empirical evidence, we assume that boundedly rational agents, selecting between extrapolative and regressive forecasting rules to predict the future inflation rate, prefer rules that have produced low prediction errors in the past. We show that integrating this behavioral expectation formation process into the monetary model leads to the possibility of endogenous macroeconomic dynamics. For instance, our model replicates certain empirical regularities such as irregular growth cycles or inflation persistence. Moreover, we observe multi-stability via a Chenciner bifurcation.

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.degruyter.com/view/j/snde.2012.16.issue-4/1558-3708.1900/1558-3708.1900.xml?format=INT
Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

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.

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 16 (2012)
Issue (Month): 4 (October)
Pages: 1-30

as
in new window

Handle: RePEc:bpj:sndecm:v:16:y:2012:i:4:n:7
Contact details of provider: Web page: http://www.degruyter.com

Order Information: Web: http://www.degruyter.com/view/j/snde

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. David Goldbaum & Bruce Mizrach, 2005. "Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision," Computing in Economics and Finance 2005 295, Society for Computational Economics.
  2. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
  3. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," NBER Working Papers 9796, National Bureau of Economic Research, Inc.
  4. Thomas Lux, 2007. "Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey," Working Papers wp07-11, Warwick Business School, Finance Group.
  5. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, number 9780521551861, November.
  6. Pesaran, M.H. & Weale, M., 2005. "Survey Expectations," Cambridge Working Papers in Economics 0536, Faculty of Economics, University of Cambridge.
  7. Florian Wagener & Jan Tuinstra, 2004. "On Learning Equilibria," Computing in Economics and Finance 2004 217, Society for Computational Economics.
  8. Boswijk, H.P. & Hommes C.H. & Manzan, S., 2005. "Behavioral Heterogeneity in Stock Prices," CeNDEF Working Papers 05-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  9. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 955-980.
  10. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
  11. 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.
  12. 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.
  13. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 269-298.
  14. Gaunersdorfer, Andrea & Hommes, Cars H. & Wagener, Florian O.O., 2008. "Bifurcation routes to volatility clustering under evolutionary learning," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 27-47, July.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
  19. Chiarella,Carl & Flaschel,Peter & Franke,Reiner, 2005. "Foundations for a Disequilibrium Theory of the Business Cycle," Cambridge Books, Cambridge University Press, number 9780521850254, November.
  20. Neugart, M. & Tuinstra, J., 2001. "Endogenous Fluctuations in the Demand of Education," CeNDEF Working Papers 01-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  21. Lines, Marji & Westerhoff, Frank, 2010. "Inflation expectations and macroeconomic dynamics: The case of rational versus extrapolative expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 246-257, February.
  22. 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.
  23. 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.
  24. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, number 9780521558747, November.
  25. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:bpj:sndecm:v:16:y:2012:i:4:n:7. 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: (Peter Golla)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.