Experimental evidence on inflation expectation formation

Damjan Pfajfar and Blaz Zakelj

Journal of Economic Dynamics and Control, 2014, vol. 44, issue C, 147-168

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.

Keywords: Laboratory experiments; Inflation expectations; New Keynesian model; Adaptive learning (search for similar items in EconPapers)
JEL-codes: C91 C92 E37 E52 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (88)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188914001079
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Experimental evidence on inflation expectation formation (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:44:y:2014:i:c:p:147-168

DOI: 10.1016/j.jedc.2014.04.012

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().