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

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.