A Time-Varying Expectations Formation Mechanism

Maurizio Bovi ()

MPRA Paper from University Library of Munich, Germany

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 E03 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: A time-varying expectations formation mechanism (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:97624

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