Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary ...to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.
We propose a joint theory of time-series momentum and reversal based on a rational-expectations model. We show that a necessary condition for momentum to arise in this framework is that information ...flows at an increasing rate. We focus on word-of-mouth communication as a mechanism that enforces this condition and generates short-term momentum and long-term reversal. Investors with heterogeneous trading strategies—contrarian and momentum traders—coexist in the marketplace. Although a significant proportion of investors are momentum traders, momentum is not completely eliminated. Word-of-mouth communication spreads rumors and generates price run-ups and reversals. Our theoretical predictions are in line with empirical findings.
•Future life satisfaction is strongly overestimated when young and underestimated in old age.•This pattern is stable over time and observed within individuals as well as across socioeconomic ...groups.•These findings support theories that unmet expectations drive the age U-shape in wellbeing.
An emerging economic literature has found evidence that wellbeing follows a U-shape over age. Some theories have assumed that the U-shape is caused by unmet expectations that are felt painfully in midlife but beneficially abandoned and experienced with less regret during old age. This paper is the first to analyze age patterns in unmet expectations. Using the German Socio-Economic Panel, a unique data set that contains life satisfaction expectations as well as the same individuals’ subsequent life satisfaction realizations, I match 132,609 life satisfaction expectations to subsequent realizations. I find people to err systematically in predicting their life satisfaction over the life cycle. They expect – incorrectly – increases in young adulthood and decreases during old age. These errors are large, ranging from 9.8% at age 21 to −4.5% at age 68. They are stable over time and observed within cohorts and individuals as well as across socio-economic groups. These findings support theories that unmet expectations drive the age U-shape in wellbeing.
Can we measure inflation expectations using Twitter? Angelico, Cristina; Marcucci, Juri; Miccoli, Marcello ...
Journal of econometrics,
June 2022, 2022-06-00, 20220601, Letnik:
228, Številka:
2
Journal Article
Recenzirano
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Drawing on Italian tweets, we employ textual data and machine learning techniques to build new real-time measures of consumers’ inflation expectations. First, we select keywords to identify tweets ...related to prices and expectations thereof. Second, we build a set of daily measures of inflation expectations around the selected tweets, combining the Latent Dirichlet Allocation (LDA) with a dictionary-based approach, using manually labeled bi-grams and tri-grams. Finally, we show that Twitter-based indicators are highly correlated with both monthly survey-based and daily market-based inflation expectations. Our new indicators anticipate consumers’ expectations, proving to be a good real-time proxy, and provide additional information beyond market-based expectations, professional forecasts, and realized inflation. The results suggest that Twitter can be a new timely source for eliciting beliefs.
Using new survey data on quantitative growth expectations of firms in Germany, we show that firms resort to local information when forming expectations about aggregate growth. Firms extrapolate from ...the economic situation in their county, industry growth and their individual business situation. Variables (fixed effects) measuring local signals account for up to 26 % (47 %) of the expectation dispersion across firms. The effect is particularly strong for small firms. Our results confirm predictions of theoretical models with rational inattention.
We reconsider the Beladi et al. (1993) technique to measure expectations in hyperinflation episodes by allowing money to be substitutable with foreign assets as well as goods. We determine new ...correctness conditions for adaptive and rational expectations formation in this context and show that, taking into account these conditions, the data for the German hyperinflation of the 1920s is consistent with rational expectation formation.
•Beladi et al. (1993) report adaptive expectation in hyperinflation Germany.•We reconsider the Beladi et al. (1993) measurement methodology.•We introduce foreign assets into the money demand function.•We determine new correctness conditions for adaptive and rational expectations.•Re-estimates are consistent with rational expectations formation.
Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to ...the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.
In this paper we propose novel techniques for the empirical analysis of adaptive learning and sticky information in inflation expectations. These methodologies are applied to the distribution of ...households’ inflation expectations collected by the University of Michigan Survey Research Center. To account for the evolution of the cross-section of inflation forecasts over time and measure the degree of heterogeneity in private agents’ forecasts, we explore time series of percentiles from the empirical distribution. Our results show that heterogeneity is pervasive in the process of inflation expectation formation. We identify three regions of the distribution that correspond to different underlying mechanisms of expectation formation: a static or highly autoregressive region on the left hand side of the median, a nearly rational region around the median and a fraction of forecasts on the right hand side of the median formed in accordance with adaptive learning and sticky information.
The aim of this paper is twofold. Firstly, we test the rationality of survey‐based and market‐based inflation expectations. Secondly, we investigate whether they indicate a different performance of ...the central bank in anchoring inflation expectations. Briefly, this paper verifies if inflation expectations' proxies display the same features regarding rationality and anchoring. Using data from the Brazilian market, we present robust evidence that both survey‐based and market‐based inflation expectations have useful content to explain realized inflation. Moreover, we find that these proxies of inflation expectations provide different assessments of the central bank's ability to anchor inflation expectations. The findings point out that central banks must monitor both survey‐based and market‐based inflation expectations to improve their monetary policy conduct.
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