Effects of inflation expectations on macroeconomic dynamics : extrapolative versus regressive expectations

Faculty/Professorship: Economic Policy  
Author(s): Lines, Marji; Westerhoff, Frank H.  
Corporate Body: BERG (Bamberg Economic Research Group)
Publisher Information: Bamberg : opus
Year of publication: 2014
Pages: 44 ; Diagramme
ISBN: 978-3-931052-76-8
Series ; Volume: BERG working paper series ; 68a 
Source/Other editions: zuerst erschienen im BERG-Verlag, 2009
Year of first publication: 2009
Language(s): English
Licence: German Act on Copyright 
URN: urn:nbn:de:bvb:473-opus4-33351
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: Workingpaper
URI: https://fis.uni-bamberg.de/handle/uniba/1437
Year of publication: 21. August 2014