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Heterogeneous expectations, learning and European inflation dynamics

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  • Weber, Anke

Abstract

This paper is the first attempt to investigate the performance of different learning rules in fitting survey data of household and expert inflation expectations in five core European economies (France, Germany, Italy, Netherlands and Spain). Overall it is found that constant gain learning performs well in out-of-sample forecasting. It is also shown that households in high inflation countries are using higher best fitting constant gain parameters than those in low inflation countries. They are hence able to pick up structural changes faster. Professional forecasters update their information sets more frequently than households. Furthermore, household expectations in the Euro Area have not converged to the inflation goal of the ECB, which is to keep inflation below to but close to 2% in the medium run. This contrasts the findings for professional experts, which seem to be more inclined to incorporate the implications of monetary union for the convergence in inflation rates into their expectations.

Suggested Citation

  • Weber, Anke, 2007. "Heterogeneous expectations, learning and European inflation dynamics," Discussion Paper Series 1: Economic Studies 2007,16, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:6137
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    File URL: https://www.econstor.eu/bitstream/10419/19693/1/200716dkp.pdf
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    References listed on IDEAS

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    1. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
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    3. N. Gregory Mankiw & Ricardo Reis, 2007. "Sticky Information in General Equilibrium," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 603-613, 04-05.
    4. Albert Marcet & Juan P. Nicolini, 2003. "Recurrent Hyperinflations and Learning," American Economic Review, American Economic Association, vol. 93(5), pages 1476-1498, December.
    5. Holden, K & Peel, D A, 1990. "On Testing for Unbiasedness and Efficiency of Forecasts," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(2), pages 120-127, June.
    6. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    7. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
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    Cited by:

    1. repec:mes:postke:v:37:y:2014:i:2:p:255-279 is not listed on IDEAS
    2. Berardi, Michele & Galimberti, Jaqueson K., 2017. "Empirical calibration of adaptive learning," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 219-237.
    3. Michele Berardi & Jaqueson K. Galimberti, 2012. "On the plausibility of adaptive learning in macroeconomics: A puzzling conflict in the choice of the representative algorithm," Centre for Growth and Business Cycle Research Discussion Paper Series 177, Economics, The Univeristy of Manchester.
    4. Steffen Henzel, 2008. "Learning Trend Inflation − Can Signal Extraction Explain Survey Forecasts?," ifo Working Paper Series 55, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    5. Jaylson Jair da Silveira & Gilberto Tadeu Lima, 2014. "Heterogeneity in Inflation Expectations and Macroeconomic Stability under Satisficing Learning," Working Papers, Department of Economics 2014_28, University of São Paulo (FEA-USP).
    6. Gilberto Tadeu Lima & Mark Setterfield & Jaylson Jair da Silveira, 2014. "Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(2), pages 255-279, December.
    7. Carlos Huertas Campos & Eliana González Molano & Cristhian Ruiz Cardozo, 2015. "La formación de expectativas de inflación en Colombia," BORRADORES DE ECONOMIA 012699, BANCO DE LA REPÚBLICA.

    More about this item

    Keywords

    Monetary policy; heterogeneous expectations; adaptive learning; survey expectations;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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