Behavioral Heterogeneity in U.S. Inflation Dynamics

Domenico Massaro, Adriana Cornea-Madeira, Cars Hommes

Risultato della ricerca: Contributo in rivistaArticolo in rivista

15 Citazioni (Scopus)

Abstract

In this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms. In our stylized framework there are two groups of price setters, fundamentalists and random walk believers. Fundamentalists are forward-looking in the sense that they believe in a present-value relationship between inflation and real marginal costs, while random walk believers are backward-looking, using the simplest rule of thumb, naive expectations, to forecast inflation. Agents are allowed to switch between these different forecasting strategies conditional on their recent relative forecasting performance. We estimate the switching model using aggregate and survey data. Our results support behavioral heterogeneity and the significance of evolutionary learning mechanism. We show that there is substantial time variation in the weights of forward-looking and backward-looking behavior. Although on average the majority of firms use the simple backward-looking rule, the market has phases in which it is dominated by either the fundamentalists or the random walk believers.
Lingua originaleEnglish
pagine (da-a)288-300
Numero di pagine13
RivistaJOURNAL OF BUSINESS & ECONOMIC STATISTICS
Volume37
DOI
Stato di pubblicazionePubblicato - 2019

Keywords

  • Evolutionary selection
  • Heterogeneous expectations
  • Phillips curve

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