What Are In‡ation Expectations Rational?

David Andolfatto (), Scott Hendry () and Kevin Moran ()
Additional contact information
Kevin Moran: UniversitŽ Laval, Canada

Working Paper Series from Rimini Centre for Economic Analysis

Abstract: Several recent papers report evidence of an apparent statistical bias in in‡ation expectations and interpret these …ndings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of in‡ation and in‡ation expectations over sample periods corresponding to those tests performed on actual data and …nd evidence of an apparent bias in in‡ation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.

Keywords: Regime changes; Learning dynamics; Monte Carlo exp eriments; Sample size. (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: Written

Downloads: (external link)
http://www.rcfea.org/RePEc/pdf/wp27_07.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: http://EconPapers.repec.org/RePEc:rim:rimwps:27-07

Access Statistics for this paper

More papers in Working Paper Series from Rimini Centre for Economic Analysis
Contact information at EDIRC.
Series data maintained by Francesco Billi ().