Abstract

The main question of this paper is how private agents form their
expectations. To answer this, we approximate survey expectations
of inflation by constant gain learning algorithms. In particular
we develop a Bayesian constant gain estimator, and show that this
gives a much better approximation to survey expectations then
simple constant gain estimators. We find that in more volatile
economies private agents pay more attention to recent data when
they form their inflationary expectations.Finally, when a regime
change occurs private agents do not follow mechanically an
adaptive rule, but understand it immediately that statistical
relations between economic variables will change.