Experimental evidence on inflation expectation formation

D. Pfajfar, B. Zakelj

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.
Original languageEnglish
Pages (from-to)147-168
JournalJournal of Economic Dynamics and Control
Volume44
DOIs
Publication statusPublished - Jul 2014

Fingerprint

Inflation
Rational Expectations
Adaptive Learning
Rationality
Model
Forecasting
Update
Likely
Heuristics
Evidence
Inflation expectations
Adaptive learning
Expectation formation
Rational expectations
Estimate
Experiment
Experiments
Recession
Sticky prices
Switching models

Keywords

  • Laboratory experiments
  • Inflation expectations
  • New Keynesian Model
  • adaptive learning

Cite this

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Experimental evidence on inflation expectation formation. / Pfajfar, D.; Zakelj, B.

In: Journal of Economic Dynamics and Control, Vol. 44, 07.2014, p. 147-168.

Research output: Contribution to journalArticleScientificpeer-review

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