Experimental Evidence on Inflation Expectation Formation (Replaced by CentER DP 2011-091)

D. Pfajfar, B. Zakelj

Research output: Working paperDiscussion paperOther research output

Abstract

Using laboratory experiments, we establish a number of stylized facts about the process of inflation expectation formation. Within a New Keynesian sticky price framework, we ask subjects to provide forecasts of inflation and their corresponding confidence bounds. We study individual responses and properties of the aggregate empirical distribution. Many subjects do not rely on a single model of expectation formation, but are rather switching between di¤erent models. About 40% of the subjects predominately use a rational rule when forecasting inflation and about 35% of agents simply extrapolate trend. Around 5% of subjects behave in an adaptive manner, while the remaining 20% behaves in accordance to adaptive learning and sticky information models. Furthermore, we find that subjects in only 60% of cases correctly perceive the underlying uncertainty in the economy when reporting confidence intervals. However, empirical analysis does not support a significant countercyclical behavior of individuals' confidence intervals.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages57
Volume2009-007
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-007

Keywords

  • Inflation Expectations
  • Experiments
  • New Keynesian Model
  • Adaptive Learning

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    Pfajfar, D., & Zakelj, B. (2009). Experimental Evidence on Inflation Expectation Formation (Replaced by CentER DP 2011-091). (CentER Discussion Paper; Vol. 2009-007). Microeconomics.