Behavioural Macroeconomics: Unveiling the Psychology of Inflation Expectations

Abstract

This article delves into the exploration of intersections between behavioural economics and macroeconomics, focusing on the psychology of inflation expectations. We present a critique of the Rational Expectations Hypothesis (REH) and propose perspectives from the standpoint of behavioural macroeconomics. In the empirical section, we examine the relationship between the evolution of inflation expectations and real inflation, revealing distinct patterns in the expected inflation distribution among the observed countries—the European Union and the United States. The article also addresses procedural rationality, emphasizing the role of recent observations in shaping inflation expectations. Additionally, it focuses on understanding the principles of behavioural macroeconomics in policy formulation, placing emphasis on adaptive rationality and intelligent decisionmaking. The integration of psychology into macroeconomics may offer a more realistic understanding of the development of inflation expectations, signifying a potential new era in economic modelling.