Behavioral Heterogeneity in U.S. Inflation Dynamics

Research output: Contribution to journalArticle

Full text download(s)

Published copy (DOI)

Author(s)

Department/unit(s)

Publication details

JournalJournal of Business and Economic Statistics
DateAccepted/In press - 15 Mar 2017
DateE-pub ahead of print - 27 Apr 2017
DatePublished (current) - 3 Apr 2019
Issue number2
Volume37
Number of pages13
Pages (from-to)288-300
Early online date27/04/17
Original languageEnglish

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.

Bibliographical note

© 2017 Informa UK Limited. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

    Research areas

  • Evolutionary selection, Heterogeneous expectations, Phillips curve

Discover related content

Find related publications, people, projects, datasets and more using interactive charts.

View graph of relations