A time-varying expectations formation mechanism

Maurizio Bovi ()

Economia Politica: Journal of Analytical and Institutional Economics, 2020, vol. 37, issue 1, No 4, 69-103

Abstract: Abstract We propose an expectations formation mechanism (EFM) aimed to explain the median—hence lay—forecaster’s year-ahead inflation predictions. The EFM is a time-varying combination of long-run expectations, current inflation and uncertainty with weights naively calibrated according to inflation dynamics. Earning fixed income, in fact, the median forecaster has an aversion toward underestimation that increases with inflation. To allow for occasional—albeit unintentional—cost-minimizing calibrations, the EFM nests various forecasting rules. Data from the Michigan Survey of Consumers sustains the argued behavior and contributes to interpret some puzzling price dynamics such as the missing disinflation and reflation.

Keywords: Survey expectations; Inflation; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: C53 C83 D84 E31 E37 (search for similar items in EconPapers)
Date: 2020
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Working Paper: A Time-Varying Expectations Formation Mechanism (2019)
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DOI: 10.1007/s40888-019-00171-7

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