Heterogeneity in Inflation Expectations and Macroeconomic Stability under Satisficing Learning

Jaylson Silveira () and Gilberto Lima

No 2014_28, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: Drawing on a considerable empirical and experimental literature that finds persistent and endogenously time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting strategies – one based on costly full rationality or perfect foresight, the second based on costless bounded rationality or adaptive foresight – in a basic macroeconomic model. Drawing in particular on the significant evidence that forecast errors have to pass some threshold before agents abandon their previously selected inflation forecasting strategy, we assume that agents switch between these forecasting strategies based on satisficing evolutionary dynamics. We find that convergence to a long-run equilibrium configuration consistent with output growth, unemployment and inflation at their natural levels is achieved even when heterogeneity in inflation expectations (with predominance of the adaptive foresight strategy) is an attractor of a noisy satisficing evolutionary dynamics. Therefore, in accordance with the empirical evidence, persistent heterogeneity in inflation expectations (with prevalence of bounded rational expectations) emerges as a long-run equilibrium outcome.

Keywords: Heterogeneous inflation expectations; perfect foresight; adaptive foresight; noisy satisficing evolutionary dynamics (search for similar items in EconPapers)
JEL-codes: C62 C73 E03 E31 (search for similar items in EconPapers)
Date: 2014-11-26
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.repec.eae.fea.usp.br/documentos/Silveira_Lima_28WP.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spa:wpaper:2014wpecon28

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers, Department of Economics from University of São Paulo (FEA-USP) Contact information at EDIRC.
Bibliographic data for series maintained by Pedro Garcia Duarte ( this e-mail address is bad, please contact ).