The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations

Branch, William A.

doi:10.1111/j.1468-0297.2004.00233.x

Cited by 390 publications

(352 citation statements)

References 38 publications

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“…Rational in ‡ation expectations would not give rise a sustained sequence of one-sided forecast errors. Roberts (1997), Carroll (2003, Mankiw, Reis, and Wolfers (2004), Branch (2004), and Adam and Padula (2003) all …nd evidence that survey-based measures of U.S. in ‡ation expectations do not make the most e¢ cient use of available information.…”

Section: Other Related Literaturementioning

confidence: 99%

Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve

Lansing

2009

Review of Economic Dynamics

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This paper introduces a form of boundedly-rational expectations into an otherwise standard New Keynesian Phillips curve. The representative agent's perceived law of motion allows for both temporary and permanent shocks to in ‡ation, the latter intended to capture the possibility of evolving shifts in the central bank's in ‡ation target. The agent's perceived optimal forecast rule de…ned by the Kalman …lter is parameterized to be consistent with the observed moments of the in ‡ation time series. From the agent's perspective, the use of a variable Kalman gain parameter is justi…ed by movements in the perceived "signalto-noise ratio," which measures the relative variances of the permanent and temporary shocks to in ‡ation. I show that this simple model of in ‡ation expectations can generate time-varying in ‡ation dynamics similar to those observed in long-run U.S. data. The U.S. signal-to-noise ratio identi…ed using the model's methodology exhibits an upward drift during the 1970s, followed by downward drift from the mid-1990s onwards. This pattern suggests that the perceived signal-to-noise ratio might be viewed as a inverse measure of the central bank's credibility for maintaining a constant in ‡ation target. Model-based values for expected in ‡ation track quite well with movements in survey-based measures of U.S. expected in ‡ation.

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Section: Other Related Literaturementioning

confidence: 99%

Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve

Lansing

2009

Review of Economic Dynamics

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“…More recently a number of authors have extended the NK model to include heterogeneous expectations, e.g. Gali and Gertler (1999), Branch and Evans (2006), De Grauwe (2010), Branch andMcGough (2009, 2010), Massaro (2012) and Anufriev, Assenza, Hommes, and Massaro (2013).…”

Section: Introductionmentioning

confidence: 99%

“…Mankiw, Reis, and Wolfers (2003) find evidence for heterogeneity in inflation expectations in the Michigan Survey of Consumers and argue that the data are inconsistent with rational or adaptive expectations, but may be consistent with a sticky information model. Branch (2004) estimates a simple switching model with heterogeneous expectations on survey data and provides empirical evidence for dynamic switching that depends on the relative mean squared errors of the predictors. Capistran and Timmermann (2009) show that heterogeneity of inflation expectations of professional forecasters varies over time and depends on the level and the variance of current inflation.…”

Section: Introductionmentioning

confidence: 99%

Individual Expectations and Aggregate Macro Behavior

et al. 2011

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“…Moreover, if agents are worried that their model is misspecified, then specifying a parsimonious model is often recommended. There is empirical evidence by Branch (2004) that some households in the Michigan survey employ simple univariate forecasting models. A possible concern is that the form of the forecasting model is inconsistent with the actual decision rule of the agent that depends on both capital and interest rates.…”

Section: The Euler Equation Approach Following Sargent (1993) and Evmentioning

confidence: 99%

“…Our viewpoint is informed as well by Branch (2004) who provides evidence from the Michigan Survey of Consumers that households are split between rational and adaptive agents.…”

Section: Bounded Rationalitymentioning

confidence: 99%

Business cycle amplification with heterogeneous expectations

Branch

McGough

2010

Econ Theory

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This paper studies the implications for business cycle dynamics of heterogeneous expectations in a stochastic growth model. The assumption of homogeneous, rational expectations is replaced with a heterogeneous expectations model where a fraction of agents hold rational expectations and the remaining fraction adopt parsimonious forecasting models that are, in equilibrium, optimal within a restricted class. Our approach nests the literature on rational expectations in business cycle models with a recent approach based on adaptive learning. We demonstrate that (i.) heterogeneous expectations can lead to substantial improvement in the internal propagation of equilibrium business cycle models and (ii.) the internal propagation depends on the degree of heterogeneity. A calibrated model with heterogeneity provides a closer fit to business cycle data than its representative agent, rational expectations counterpart.

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The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations

Cited by 390 publications

References 38 publications

Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve

Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve

Individual Expectations and Aggregate Macro Behavior

Business cycle amplification with heterogeneous expectations

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