Religion, Society, and World Relations Faculty of Economics, Law and Social Sciences

Pattern-Based Expectations in Macroeconomics

Tobias Rötheli: This project deals with the collection and modelling of expectations with regard to macroeconomic studies.

Duration
11/2012 - 11/2015

Funding
Deutsche Forschungsgemeinschaft (DFG)

Project management

Prof. Dr. Tobias Rötheli
Holder of the Professorship for Macroeconomics, in particular Monetary and Currency Theory (Makroökonomie, insb. Geld- und Währungstheorie) (Faculty of Economics, Law and Social Sciences)

This project deals with the collection and modelling of expectations with regard to macroeconomic studies. Inflation and income are particularly important variables over whose future course expectations are formed. Such expectations play a central role in many decisions that are important for macroeconomic phenomena. Particularly noteworthy are price setting in goods and financial markets and the consumption/savings decision. Expectations thus influence economic fluctuations and inflation. The modelling of expectation formation is a core element in the analysis of macroeconomic relationships and influences the economic policy conclusions derived from it. Research on expectation formation in recent decades is characterized by different variants of rational expectations. However, many empirical studies (including, for example, experimental work and studies based on survey data) challenge the hypothesis of rational expectations and point to systematic errors in human estimation of the future. The project projected here follows this critical view and is thus a contribution to the modelling of limited-rational expectations. The project ties in with contributions from cognitive psychology and collects data under experimental conditions. The theoretical basis of this undertaking is the concept of pattern recognition. Based on preliminary work in financial market economics, test persons are shown a sufficient variety of patterns from a time series for the modelling phase, whose future development they have to assess. In this project, expectations about the course of inflation and national income over a horizon of one year and five years are thus questioned. In the various experimental set-ups, the test persons are also provided with information on expert forecasts and inflation targets of the central bank, among other things. In a first round of statistical studies, hypotheses on the relationship between short-term and long-term expectations, the difference between inflation and income expectations, and the significance of central bank communication and published economic forecasts can thus be tested. The experimentally collected data then serve primarily to model inflation and national income expectations in various econometric studies. In this way, questions of the dynamics and heterogeneity of inflation expectations, the role of inflation expectations in the inflation process and in interest rate determination, and ultimately the influence of expectations on overall economic consumption are examined in turn. The experimentally collected data also make it possible to quantify the heterogeneity and uncertainty of expectations. These variables in turn play an important role in the development of inflation, interest rates and consumption.

Economics

Cooperation partner

Research focus

Religion, Society, and World Relations