This paper uses the European Commission’s Consumer Survey to assess whether inflation expectations have converged and whether inflation uncertainty has diminished following the introduction of the Euro in Europe. Consumers’ responses to the survey suggest that inflation expectations depend more on past national inflation rates than on the ECB’s anchor for price stability. The convergence in inf...

Standard economic models assume that the weight given to information from different sources depends exclusively on its diagnosticity. In this paper we study whether the same piece of information is weighted more heavily simply because it arose from direct experience rather than from observation. We investigate this possibility by conducting repeated game experiments in which groups of players a...

In a two-period pure exchange economy with financial assets, a temporary financial equilibrium is an equilibrium of the current spot and security markets given forecasts of future prices and returns. The temporary equilibrium model can then be interpreted as a Walrasian model where preferences depend on prices. This idenfication implies, among other consequences, the generic determinateness of ...

Forward-looking monetary models with Taylor-type interest rate rules are known to generate indeterminacies, with a potential dependence on extraneous “sunspots,” for some structural and policy parameters. We investigate the stability of these solutions under adaptive learning, focusing on “common factor” or “resonant frequency” representations in which the observed sunspot has a suitable time-s...

Theories of expectations-based reference-dependent preferences have provided a critical modeling innovation, incorporating a structured theory of the formation of reference points. An important prediction of thesemodels is a monotone response in behavior to changes in expectations. To test such models we conduct a real-effort experiment manipulating expectations and examining consequences on ef...

An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset’s historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging...

The communication policy of the European Central Bank attracts a lot of attention from financial markets. This paper analyses the informational content of the monthly introductory statements of the ECB president explaining interest rate decisions with regard to inflation expectations of financial market experts for the euro area from February 1999 to June 2007. Estimations are conducted for the...

We examine stability under learning of sunspot equilibria in Real Business Cycle type models with indeterminacies. Our analysis emphasizes the importance of examining alternative representations of sunspot solutions. A general bivariate reduced form contains parameter regions in which sunspots are stable under learning. However, for parameters restricted to those generated by standard models of...

The paper introduces the concept of adjustment utility, that is, referencedependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unex...

We study a global game in which actions are strategic complements over some region and strategic substitutes over another region. An agent’s payoff depends on a market fundamental and the actions of other agents. If the degree of congestion is sufficiently large, agents’ strategies are non-monotonic in their signal about the market fundamental. In this case, a signal that makes them believe tha...