Pattern-Based Inflation Expectations

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This paper presents an empirically based model of rational expectations. Bottom-up inflation expectations are computed using data from a once-only laboratory-based survey. To capture cognition under habitual conditions (Kahneman, 2003) we elicit subjects’ responses to stylized time series patterns of the CPI. These pattern-based expectations are shown to make up the systematic part of the data on inflation expectations from the Michigan consumer survey and they capture expectations relevant for inflation dynamics. The proposed model of expectations has more in common with the theory of rational expectations than with standard surveys of expectations since we can retrospectively compute expectations for earlier historical times as well as for the future as part of what-if-scenarios.

Keywords: behavioral model of expectations, experimental economics, inflation expectations, pattern extrapolation