The Behavioral Economics of Inflation Expectations: Macroeconomics Meets Psychology

Description

As one of the first texts to take a behavioral approach to macroeconomic expectations, this book introduces a new way of doing economics. Roetheli uses cognitive psychology in a bottom-up method of modeling macroeconomic expectations. His research is based on laboratory experiments and historical data, which he extends to real-world situations. Pattern extrapolation is shown to be the key to understanding expectations of inflation and income. The quantitative model of expectations is used to analyze the course of inflation and nominal interest rates in a range of countries and historical periods. The model of expected income is applied to the analysis of business cycle phenomena such as the great recession in the United States. Data and spreadsheets are provided for readers to do their own computations of macroeconomic expectations. This book offers new perspectives in many areas of macro and financial economics.

Tobias F. Roetheli is Professor of Macroeconomics at the University of Erfurt.

'The real rate of interest - the nominal rate adjusted for expected inflation - is a key variable for our understanding of macroeconomic fluctuations, growth, and history. Tobias Roetheli combines behavioral and experimental, lab-based economics to provide new and improved historical estimates of expected inflation as well as novel methods for forecasting it. His book is one of the most exciting, important, and original contributions to economic analysis in years. It will change the way much future research in economics is done.' Richard Sylla, New York University 'Despite the methodological success of the rational expectations hypothesis, abundant empirical work shows that its soundness as a theoretical assumption is weak. In this book, Tobias Roetheli argues that a better approach might be to look at what science has to say about how expectations are actually formed. Drawing on behavioral economics and psychology, he proposes that inflationary expectations are formed in ways that comport well with our strong ability to recognize - perhaps even 'over recognize' - patterns. He then shows such pattern-based expectations outperform rational expectations models in a variety of ways. This book will provide ample grist for researchers eager to incorporate new advances in behavioral economics and psychology into macroeconomics.' David C. Rose, author of The Moral Foundation of Economic Behavior and Why Culture Matters Most 'Roetheli's book was long overdue. Ever since Katona, the significance of expectations for modeling the economy has been known. The last few decades saw the recognition of the importance of empirical psychological study of economic behavior, as opposed to a perspective centered on derivation from first principles. Roetheli investigates how expectations are formed, and analyzes the consequences of his findings for key economic domains. The Behavioral Economics of Inflation Expectations should be read by anyone who needs to understand economic forecasting by the public.' David Leiser, Ben Gurion University of the Negev 'This monograph will be of greatest value to graduate students and researchers focusing on the topic ...' S. J. Chapman Jr., Choice 'Roetheli's theory of expectations heads deep into the wilderness by taking cognitive sciences as the first principles. The book is very well-written and expertly guides the reader through Roetheli's paradigm for how people form expectations and impact the economy, inflation, and interest rates ... the book is thought provoking, with a novel look at a critical topic in economics.' William Branch, Journal of Economic Literature