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HETEROGENEOUS OR HOMOGENEOUS INFLATION EXPECTATION FORMATION MODELS: A CASE STUDY OF CHINESE HOUSEHOLDS AND FINANCIAL PARTICIPANTS

Yingying Xu, Zhixin Liu () and Xing Zhang ()
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Yingying Xu: School of Economics and Management, Beihang University, No. 37 Xueyuang Road, Haidian District, Beijing, P. R. China
Zhixin Liu: School of Economics and Management, Beihang University, No. 37 Xueyuang Road, Haidian District, Beijing, P. R. China
Xing Zhang: School of Economics and Management, Beihang University, No. 37 Xueyuang Road, Haidian District, Beijing, P. R. China

The Singapore Economic Review (SER), 2017, vol. 62, issue 04, 859-874

Abstract: This paper attempts to identify whether the inflation expectation formation models adopted by Chinese agents are heterogeneous or homogeneous. A Gaussian mixture model is developed assuming that agents form inflation expectations by selecting a model from alternatives. Analysis results reveal that only adaptive expectation (AE) model is significant, indicating that both households and financial participants are fairly homogeneous in selecting inflation expectation formation models. Therefore, the mechanism of heterogeneous models is inoperative in explaining the heterogeneous inflation expectations in China, and the AE is the main driver of Chinese agents’ perceptions about cost.

Keywords: Inflation expectation; model uncertainty; heterogeneous expectations; adaptive expectation (search for similar items in EconPapers)
Date: 2017
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