IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations

  • Gilberto Tadeu Lima

    ()

  • Mark Setterfield, Jaylson Jair da Silveira

Drawing on an extensive empirical literature that suggests persistent and time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting heuristics – one based on the current rate of inflation, the second anchored to the official inflation target – in a simple macrodynamic model. Decision makers switch between these forecasting heuristics based on satisficing evolutionary dynamics. We show that convergence towards an equilibrium consistent with the level of output and rate of inflation targeted by policy makers is achieved regardless of whether or not the satisficing evolutionary dynamics that guide the choices agents make between inflation forecasting strategies are subject to noise. We also show that full credulity – a situation where all agents eventually use the forecasting heuristic based on the target rate of inflation – is neither a necessary condition for realization of the inflation target, nor an inevitable consequence of the economy’s achievement of this target. These results demonstrate that uncertainty in decision making resulting in norm-based inflation expectations that are both heterogeneous and time-varying need not thwart the successful conduct of macroeconomic policy.

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.fea.usp.br/feaecon/RePEc/documentos/Lima_Setterfield_Silveira11WPa.pdf
Download Restriction: no

Paper provided by University of São Paulo (FEA-USP) in its series Working Papers, Department of Economics with number 2013_11.

as
in new window

Length:
Date of creation: 01 Oct 2013
Date of revision:
Handle: RePEc:spa:wpaper:2013wpecon11
Contact details of provider: Postal: (011) 818-5811
Phone: +55-11-3091-5944
Fax: +55-11-3091-6013
Web page: http://www.fea.usp.br/feaecon/
Email:


More information through EDIRC

Order Information: Email:


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. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  4. Carlos Capistrán & Allan Timmermann, 2009. "Disagreement and Biases in Inflation Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 365-396, 03.
  5. David G. Blanchflower & Conall MacCoille, 2009. "The formation of inflation expectations: an empirical analysis for the UK," NBER Working Papers 15388, National Bureau of Economic Research, Inc.
  6. N. Gregory Mankiw & Ricardo Augusto Marc Rocha Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," Yale School of Management Working Papers ysm391, Yale School of Management.
  7. Michael W. M. Roos & Wolfgang J. Luhan, 2013. "Information, Learning and Expectations in an Experimental Model Economy," Economica, London School of Economics and Political Science, vol. 80(319), pages 513-531, 07.
  8. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
  9. Weber, Anke, 2007. "Heterogeneous expectations, learning and European inflation dynamics," Discussion Paper Series 1: Economic Studies 2007,16, Deutsche Bundesbank, Research Centre.
  10. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  11. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2008. "The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 219-254, June.
  12. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
  13. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  14. David Dequech, 2004. "Uncertainty: individuals, institutions and technology," Cambridge Journal of Economics, Oxford University Press, vol. 28(3), pages 365-378, May.
  15. repec:cup:cbooks:9780521341493 is not listed on IDEAS
  16. Paul Davidson, 1996. "Reality and Economic Theory," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 18(4), pages 479-508, July.
  17. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, 04.
  18. Sujit Kapadia, 2005. "Inflation-Target Expectations and Optimal Monetary Policy," Money Macro and Finance (MMF) Research Group Conference 2005 81, Money Macro and Finance Research Group.
  19. Gilberto Tadeu Lima & Mark Setterfield, 2008. "Inflation targeting and macroeconomic stability in a Post Keynesian economy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(3), pages 435-461, April.
  20. 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.
  21. Branch, William A. & McGough, Bruce, 2010. "Dynamic predictor selection in a new Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1492-1508, August.
  22. Pfajfar, Damjan & Santoro, Emiliano, 2010. "Heterogeneity, learning and information stickiness in inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 426-444, September.
  23. Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design : Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.
  24. Mark Setterfield, 2006. "Is inflation targeting compatible with Post Keynesian economics?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(4), pages 653-671, July.
  25. repec:cup:cbooks:9781107019294 is not listed on IDEAS
  26. Gale, John & Binmore, Kenneth G. & Samuelson, Larry, 1995. "Learning to be imperfect: The ultimatum game," Games and Economic Behavior, Elsevier, vol. 8(1), pages 56-90.
  27. Simon, Herbert A, 1978. "Rationality as Process and as Product of Thought," American Economic Review, American Economic Association, vol. 68(2), pages 1-16, May.
  28. Setterfield, Mark, 2007. "The rise, decline and rise of incomes policies in the US during the post-war era: an institutional-analytical explanation of inflation and the functional distribution of income," Journal of Institutional Economics, Cambridge University Press, vol. 3(02), pages 127-146, August.
  29. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
  30. Diron, Marie & Mojon, Benoît, 2005. "Forecasting the central bank’s inflation objective is a good rule of thumb," Working Paper Series 0564, European Central Bank.
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:spa:wpaper:2013wpecon11. 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: (Pedro Garcia Duarte)

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.