Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/38825
Authors: 
Lines, Marji
Westerhoff, Frank
Year of Publication: 
2009
Series/Report no.: 
BERG Working paper series on government and growth 68
Abstract: 
In this paper we integrate heterogeneous inflation expectations into a simple monetary model. Guided by empirical evidence we assume that boundedly rational agents, selecting between extrapolative and regressive forecasting rules to predict the future inflation rate, prefer rules that have produced low prediction errors in the past. We show that integrating this behavioral expectation formation process into the monetary model leads to the possibility of endogenous macroeconomic dynamics. For instance, our model replicates certain empirical regularities such as irregular growth cycles or inflation persistence. Moreover, we observe multi-stability via a Chenciner bifurcation.
Subjects: 
Extrapolative and regressive expectations
dynamic predictor selection
macroeconomic dynamics
nonlinearities and chaos
bifurcation analysis
JEL: 
C62
C63
E31
E32
ISBN: 
978-3-931052-76-8
Document Type: 
Working Paper

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