Effects of Inflation Expectations on Macroeconomic Dynamics: Extrapolative Versus Regressive Expectations

Faculty/Professorship: Economic Policy  
Author(s): Westerhoff, Frank H.  ; Lines, Marji
Title of the Journal: Studies in nonlinear dynamics and econometrics : SNDE ; quarterly publ. electronically on the internet
ISSN: 1558-3708
Publisher Information: Berlin ; Boston, Mass. : De Gruyter
Year of publication: 2012
Issue: 16 (2012), 4, Article 7
Pages: 28 ; Illustrationen, Diagramme
Year of first publication: 2009
Language(s): English
DOI: 10.1515/1558-3708.1900
URL: http://www.degruyter.com/view/j/snde.2012.16.is...
In this paper, we integrate heterogeneous inflation expectations into a simple monetary model.
Guided by empirical evidence, we assume that boundedly rational agents, selecting between extrapolative
and regressive forecasting rules to predict the future inflation rate, prefer rules that have
produced low prediction errors in the past. We show that integrating this behavioral expectation
formation process into the monetary model leads to the possibility of endogenous macroeconomic
dynamics. For instance, our model replicates certain empirical regularities such as irregular growth
cycles or inflation persistence. Moreover, we observe multi-stability via a Chenciner bifurcation.
Keywords: extrapolative and regressive expectations, dynamic predictor selection, macroeconomic dynamics, nonlinearities and chaos, bifurcation analysis
Type: Article
URI: https://fis.uni-bamberg.de/handle/uniba/1414
Year of publication: 14. June 2013