Raf Wouters (National Bank of Belgium): Adaptive learning and survey expectations of inflation

Raf Wouters (National Bank of Belgium): Adaptive learning and survey expectations of inflation

Co-author: Sergey Slobodyan

Abstract

The use of survey information on infl‡ation expectations as an observable in a DSGE model can refi…ne substantially the identi…cation of the shocks that drive the infl‡ation process. An optimal integration of the survey information improves the model forecast for both infl‡ation and the other macroeconomic variables. Models with expectations based on an Adaptive Learning setup can exploit the survey information more effi…ciently than their Rational Expectations counterparts. The resulting time-variation in the perceived in‡flation target, persistence and shock sensitivity provides a rich description of the joint dynamics in realized and expected infl‡ation.

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