Barro-Gordon Revisited: Reputational Equilibria with Inferential Expectations

Abstract

We incorporate inferential expectations into the Barro-Gordon model (1983a) of time inconsistency and consider reputational equilibria. The range of sustainable equilibria shrinks as the private sector becomes more belief-conservative.

Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence

“…Applications of sticky belief adjustment include, among others, optimal principal agent contracts (Rabin and Schrag, 1999), individual responses to market signals (Sims, 2003), a micro-foundation for the New Keynesian Phillips curve (Mankiw and Reis, 2002), consumer and producer behavior (Reis, 2006a(Reis, , 2006, and pricing under information costs (Woodford, 2009). Inferential expectations modeling has been applied to explain the uncovered interest rate parity failure Zizzo, 2009, 2012), central bank credibility (Henckel et al, 2011(Henckel et al, , 2013 and merger decisions by competition regulators (Lyons et al, 2012).To conclude, there are different ways to model sticky belief adjustment. What we found overall is that there is support for stochastic time-dependence (beliefs change around 50% of the time, other things being equal) and state-dependent sticky belief adjustment (almost half of the subjects are belief conservative to some degree) and Quasi-Bayesian partial belief adjustment (when adjustment takes place, it is by around 40%).…”

Three dimensions of central bank credibility and inferential expectations: The Euro zone

“…17 Alternatively, though we do not consider this likely for the Euro area, an in ‡ation bias may be present, implying a wedge between the o¢ cial in ‡ation target and the actual equilibrium value, and this is imperfectly observed by experts. This latter possibility is in the spirit of Gordon (1983a, 1983b) and Henckel et al (2011). 18 See http://stats.oecd.org/index.aspx?queryid=22519.…”

“…In view of what we consider to be reasonable implications and foundations, our modelling strategy is an extension of the IE work on central banking by Henckel et al (2011). We treat beliefs about the central bank in ‡ation target as a null belief in a hypothesis test, where H 0 corresponds to the o¢ cial target value.…”

“…As discussed earlier, in the IE framework it is a common convention to adopt rational expectations as the alternative hypothesis (Menzies and Zizzo, 2009;Henckel et al, 2011). Adopting that convention at a country level means the null hypothesis for price-setting agents in, say, Italy, is that the ECB really is pursuing CB = 2% in that country, but if experts do not believe this, they work out E [ ].…”