EconPapers    
Economics at your fingertips  
 

Are Inflation Expectations Rational?

David Andolfatto (), Scott Hendry () and Kevin Moran ()

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Several recent papers report evidence of an apparent statistical bias in inflation expectations and interpret these findings 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 inflation and inflation expectations over sample periods corresponding to those tests performed on actual data and find evidence of an apparent bias in inflation 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 experiments; Sample size (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
Date: 2007-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.rcea.org/RePEc/pdf/wp27_07.pdf

Related works:
Journal Article: Are inflation expectations rational? (2008) Downloads
Working Paper: Are Inflation Expectations Rational? (2005) Downloads
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: https://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.
Bibliographic data for series maintained by Marco Savioli ().

 
Page updated 2020-02-20
Handle: RePEc:rim:rimwps:27_07