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Inflation expectations formation in the presence of policy shifts and structural breaks: An experimental analysis

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  • Maertens Odria, Luís Ricardo
  • Rodríguez, Gabriel

Abstract

In this paper we study how inflation expectations are formed and whether these change due to the occurrence of policy shifts or structural breaks. We conduct 4 experiments with 75 inexperienced subjects, in which we ask them to predict future home inflation and report confidence intervals. At three points in time during our experiments, we also ask our participants to provide additional information regarding the uncertainty about their expectations. Our design allowed us to gather 6750 home inflation point forecasts and confidence intervals. We find that: (1) inflation expectations are seldom rational, (2) our subjects generally ignore valuable information and, instead, tend to pay close attention to past trends, (3) the adoption of inflation targeting increases the amount of subjects that forecast in a rational fashion and reduces the uncertainty about future inflation, and (4) a recession reduces rationality among forecasters, yet induces them to expect inflation to revert to its mean.

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  • Maertens Odria, Luís Ricardo & Rodríguez, Gabriel, 2013. "Inflation expectations formation in the presence of policy shifts and structural breaks: An experimental analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 44(C), pages 59-67.
    • Handle: RePEc:eee:soceco:v:44:y:2013:i:c:p:59-67
    DOI: 10.1016/j.socec.2013.02.001
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    1. repec:zbw:rwirep:0528 is not listed on IDEAS
    2. Dzmitry Kruk, 2016. "SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus," BEROC Working Paper Series 39, Belarusian Economic Research and Outreach Center (BEROC).
    3. Deversi, Marvin, 2014. "Do Macroeconomic Shocks Affect Intuitive Inflation Forecasting? An Experimental Investigation," Ruhr Economic Papers 528, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Carola Binder & Alex Rodrigue, 2018. "Household Informedness and Long‐Run Inflation Expectations: Experimental Evidence," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 580-598, October.
    5. Marvin Deversi, 2014. "Do Macroeconomic Shocks Affect Intuitive Inflation Forecasting? An Experimental Investigation," Ruhr Economic Papers 0528, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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    More about this item

    Keywords

    Inflation expectations; Experimental analysis; Rational expectations; Inflation targeting; Structural breaks;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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