Anchoring of expectations: The role of credible targets in a game experiment

Bodo Herzog

Journal of Economic and Financial Studies (JEFS), 2015, vol. 3, issue 6, 1-15

Abstract: This paper provides new evidence on the formation and anchoring of inflation expectations. I conduct a game experiment and analyze the adjustment as well as the impact of credible targets on expectations. In addition, I evaluate the idiosyncratic determinants on the formation of expectations. The analysis reveals six results: First, I find evidence that long-term inflation expectations are firmly anchored to a credible target. Second, a temporary deviation due to unexpected monetary policy might trigger a decline in credibility, and third a de-anchoring of expectations due to uncertainty. Fourth, I find that people change their expectations little if a credible target exists. Fifth, expectations exhibit a large degree of time-variance only in environments without a target. Sixth, the dynamic adjustment to an ‘incomplete’ equilibrium, which is theoretically unstable, is nevertheless rapid and persistent in case of credible targets. All in all, I demonstrate a unique game setup with contributions to both experimental and monetary economics.

Keywords: Central Banking; Experimental Evidence; Guessing Game; Inflation Expectations. (search for similar items in EconPapers)
JEL-codes: C91 C92 D81 D84 E31 E52 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:lrc:lareco:v:3:y:2015:i:6:p:1-15

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