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Inferential Expectations

Author

Listed:
  • 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 'a' 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.

Suggested Citation

  • Gordon D. Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," CAMA Working Papers 2005-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2005-12
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/12_menzies_zizzo_2005.pdf
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    Citations

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    Cited by:

    1. 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.
    2. Cohen, Samuel N. & Henckel, Timo & Menzies, Gordon D. & Muhle-Karbe, Johannes & Zizzo, Daniel J., 2019. "Switching cost models as hypothesis tests," Economics Letters, Elsevier, vol. 175(C), pages 32-35.
    3. 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..
    4. Henckel, Timo & Menzies, Gordon D. & Prokhovnik, Nick & Zizzo, Daniel J., 2011. "Barro-Gordon revisited: Reputational equilibria with inferential expectations," Economics Letters, Elsevier, vol. 112(2), pages 144-147, August.
    5. Gordon Menzies & Daniel Zizzo, 2007. "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.
    6. Timo Henckel & Gordon D. Menzies & Peter Moffat & Daniel J. Zizzo, 2019. "Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone," Working Paper Series 56, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    7. Ruttachai Seelajaroen & Pornanong Budsaratragoon & Boonlert Jitmaneeroj, 2020. "Do monetary policy transparency and central bank communication reduce interest rate disagreement?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(3), pages 368-393, April.
    8. 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.
    9. 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.
    10. Timo Henckel & Gordon D. Menzies & Peter G. Moffatt & Daniel J. Zizzo, 2022. "Belief adjustment: a double hurdle model and experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 26-67, February.
    11. Mirza Ashfaq Ahmed & Riffat Zulfiqar & Muhammad Anwar ul Haq & Noreena Kausar & Shaista Khalid, 2020. "Customer Purchase Intentions toward Islamic Banking Products in Pakistan: A Study of Religiosity-Based Marketing," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(10), pages 1187-1202, October.
    12. 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.
    13. Clement A. Tisdell, 2018. "Diversity In Economic Decision-Making And Behaviour: A New Brief Review," Advances in Decision Sciences, Asia University, Taiwan, vol. 22(1), pages 351-368, December.
    14. 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.
    15. Henckel, Timo & Menzies, Gordon D. & Moffatt, Peter & Zizzo, Daniel J., 2019. "Three dimensions of central bank credibility and inferential expectations: The Euro zone," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 294-308.
    16. Easaw Joshy & Mossay Pascal, 2015. "Households forming macroeconomic expectations: inattentive behavior with social learning," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(1), pages 339-363, January.
    17. Joshy Easaw & Atanu Ghoshray & Saeed Heravi, 2014. "Households' Forming Subjective Expectations Using Perceived News: Do Shocks to ‘Good’ News Matter More Than ‘Bad’ News?," Manchester School, University of Manchester, vol. 82(1), pages 1-16, January.
    18. 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.
    19. George Chouliarakis & Mónica Correa-López, 2014. "A fair wage model of unemployment with inertia in fairness perceptions," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 88-114, January.
    20. Menzies Gordon Douglas & Zizzo Daniel John, 2009. "Inferential Expectations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-27, December.
    21. Timo Henckel & Gordon Menzies & Peter Moffat & Daniel J. Zizzo, 2017. "Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence," Working Paper Series 40, Economics Discipline Group, UTS Business School, University of Technology, Sydney.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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