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Anchoring of expectations : the role of credible targets in a game experiment

  • This paper provides new evidence on the formation and anchoring of inflation expectations. I conduct a game experiment and analyze the adjustment as well as the impact of credible targets on expectations. In addition, I evaluate the idiosyncratic determinants on the formation of expectations. The analysis reveals six results: First, I find evidence that long-term inflation expectations are firmly anchored to a credible target. Second, a temporary deviation due to unexpected monetary policy might trigger a decline in credibility, and third a de-anchoring of expectations due to uncertainty. Fourth, I find that people change their expectations little if a credible target exists. Fifth, expectations exhibit a large degree of time-variance only in environments without a target. Sixth, the dynamic adjustment to an ‘incomplete’ equilibrium, which is theoretically unstable, is nevertheless rapid and persistent in case of credible targets. All in all, I demonstrate a unique game setup with contributions to both experimental and monetary economics.

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Author of HS ReutlingenHerzog, Bodo
Erschienen in:Journal of economic & financial studies
Publisher:LAR Center Press
Place of publication:Toronto
Document Type:Journal article
Publication year:2015
Tag:central banking; experimental evidence; guessing game; inflation expectations
Page Number:15
First Page:1
Last Page:15
DDC classes:330 Wirtschaft
Open access?:Ja
Licence (German):License Logo  Creative Commons - Namensnennung