Experimental evidence on inflation expectation formation

D. Pfajfar, B. Zakelj

Research output: Contribution to journalArticleScientificpeer-review

39 Citations (Scopus)
426 Downloads (Pure)

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

Keywords

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

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