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