Cornea-Madeira, Adriana orcid.org/0000-0002-0889-7145, Hommes, Cars and Massaro, Domenico (2019) Behavioral Heterogeneity in U.S. Inflation Dynamics. Journal of Business and Economic Statistics. pp. 288-300. ISSN 0735-0015
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.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 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. |
Keywords: | Evolutionary selection,Heterogeneous expectations,Phillips curve |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > The York Management School |
Depositing User: | Pure (York) |
Date Deposited: | 15 May 2017 14:20 |
Last Modified: | 29 Oct 2024 00:57 |
Published Version: | https://doi.org/10.1080/07350015.2017.1321548 |
Status: | Published |
Refereed: | Yes |
Identification Number: | 10.1080/07350015.2017.1321548 |
Related URLs: | |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:116520 |