TY - JOUR
T1 - Inflation expectations formation in the presence of policy shifts and structural breaks
T2 - An experimental analysis
AU - Maertens Odria, Luís Ricardo
AU - Rodríguez, Gabriel
PY - 2013/6
Y1 - 2013/6
N2 - In this paper we study how inflation expectations are formed and whether these change due to the occurrence of policy shifts or structural breaks. We conduct 4 experiments with 75 inexperienced subjects, in which we ask them to predict future home inflation and report confidence intervals. At three points in time during our experiments, we also ask our participants to provide additional information regarding the uncertainty about their expectations. Our design allowed us to gather 6750 home inflation point forecasts and confidence intervals. We find that: (1) inflation expectations are seldom rational, (2) our subjects generally ignore valuable information and, instead, tend to pay close attention to past trends, (3) the adoption of inflation targeting increases the amount of subjects that forecast in a rational fashion and reduces the uncertainty about future inflation, and (4) a recession reduces rationality among forecasters, yet induces them to expect inflation to revert to its mean.
AB - In this paper we study how inflation expectations are formed and whether these change due to the occurrence of policy shifts or structural breaks. We conduct 4 experiments with 75 inexperienced subjects, in which we ask them to predict future home inflation and report confidence intervals. At three points in time during our experiments, we also ask our participants to provide additional information regarding the uncertainty about their expectations. Our design allowed us to gather 6750 home inflation point forecasts and confidence intervals. We find that: (1) inflation expectations are seldom rational, (2) our subjects generally ignore valuable information and, instead, tend to pay close attention to past trends, (3) the adoption of inflation targeting increases the amount of subjects that forecast in a rational fashion and reduces the uncertainty about future inflation, and (4) a recession reduces rationality among forecasters, yet induces them to expect inflation to revert to its mean.
KW - Experimental analysis
KW - Inflation expectations
KW - Inflation targeting
KW - Rational expectations
KW - Structural breaks
UR - http://www.scopus.com/inward/record.url?scp=84874727529&partnerID=8YFLogxK
U2 - 10.1016/j.socec.2013.02.001
DO - 10.1016/j.socec.2013.02.001
M3 - Article
AN - SCOPUS:84874727529
SN - 1053-5357
VL - 44
SP - 59
EP - 67
JO - Journal of Socio-Economics
JF - Journal of Socio-Economics
ER -