Anchoring of Expectations: The Role of Credible Targets in a Game Experiment


  • Bodo Herzog ESB Business School, Reutlingen Universtiy



Central Banking, Experimental Evidence, Guessing Game, Inflation Expectations.


This paper provides new evidence on the formation and anchoring of inflation expectations. I conduct a game experiment and analyze the adjustment as well as the impact of credible targets on expectations. In addition, I evaluate the idiosyncratic determinants on the formation of expectations. The analysis reveals six results: First, I find evidence that long-term inflation expectations are firmly anchored to a credible target. Second, a temporary deviation due to unexpected monetary policy might trigger a decline in credibility, and third a de-anchoring of expectations due to uncertainty. Fourth, I find that people change their expectations little if a credible target exists. Fifth, expectations exhibit a large degree of time-variance only in environments without a target. Sixth, the dynamic adjustment to an ‘incomplete’ equilibrium, which is theoretically unstable, is nevertheless rapid and persistent in case of credible targets. All in all, I demonstrate a unique game setup with contributions to both experimental and monetary economics.


Ariely, D. (2008). Predictably Irrational, Harper, New York.

Blanchard, O., Dell'Ariccia, G., & Mauro, P. (2010). Rethinking macroeconomic policy, IMF Staff Position Note, February.

Brazier, A., Harrison, R., King, M., & Yates, T. (2008). The dangers of inflation expectations of macroeconomic stability: Heuristics switching in an overlapping generations monetary model. Working Paper 303, Bank of England, August.

Camerer, C. (2003). Behavioral Game Theory. Princeton University Press.

Cargill, T., & Parker, E. (2004). Price deflation, money demand, and monetary policy discontinuity: a comparative view of Japan, China, and the United States. The North American Journal of Economics and Finance, 15(1), 125-147.

Carroll, C. (2003).The epidemiology of macroeconomic expectations. Johns Hopkins Working Paper Series, 1-26.

Capistran, C., & Timmermann, A. (2009). Disagreement and biases in inflation expectations. Journal of Money, Credit and Banking, 41(2-3), 365-396.

Chew, S., Epstein, L., & Segal, U. (1991). Mixture symmetry and quadratic utility, Econometrica, 59, 139-163.

Clark, T., & Nakata, T. (2008). Has the behavior of inflation and long-term inflation expectations changed?, Economic Review, QI, 17-50.

Clark, T., & Davig, T. (2008). An empirical assessment of the relationships among inflation and short- and long-term expectations. Research Working Paper Federal Reserve Bank of Kansas City, 08-16.

Demertzis, M., Marcellino, M., & Viegi, N. (2009). Anchors for inflation expectations. DNB Working Paper, No. 229, November.

ECB. (2006). Monthly Bulletin. European Central Bank, Frankfurt, July.

Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics, 75, 643-669.

Forsells, M., & Kenny, G. (2008). The rationality of consumers' inflation expectations: survey-based evidence for the euro area. Journal of Business Cycle Measurement and Analysis, 1(1), 13-41.

Galati, G., Poelhekke, S., & Zhou, C. (2011). Did the crisis affect inflation expectations?. International Journal of Central Banking, 7(1), 167-207.

Gueth, W., Kocher, M., & Sutter, M. (2002). Experimental 'beauty contests' with homogeneous and heterogenous players and with interior and boundary equilibria. Economics Letters, 74, 219-228.

Gul, F., & Pesendorfer, W. (2005). The revealed preference theory of changing tastes. Review of Economic Studies, 72(2), 429-448.

Heinemann, F., Nagel, R., & Satorra, A. (2009). Measuring strategic uncertainty in coordination games, Review of Economic Studies, 76(1), 181-221.

Herzog, B. (2015). Quantum Model of Decision-Making In Economics. Journal of Quantum Information Science, 5(1), 1-5.

Hoerdahl, P., & Tristani, O. (2012). Inflation risk premia in the term structure of interest rates. Journal of the European Economic Association, 10(3), 634-657.

Kahneman, D., & Tversky, A. (1976). Prospect theory: an analysis of decision under risk, Econometrica, 47, 263-291.

Kocher, M., & Sutter, M. (2005). The decision maker matters: Individual versus team behavior in experimental beauty-contest games. Economic Journal, 115, 200-223.

Levin, A., Natalucci, F., & Piger, J. (2004). The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Review, 86(4), 51-80.

Loomes, G., & Sugden, R. (1982). Regret theory: an alternative theory of rational choice under uncertainty. Economic Journal, 92, 805-824.

Mankiw, G., & Reis, R. (2003). What measure of inflation should a central bank target?. European Economic Review, 1(5), 1058-1086.

Nagel, R. (1995). Unraveling in guessing games: An experimental study. American Economic Review,85(5), 1313-26

Nagel, R., & Grosskopf, B. (1998). The two-person beauty contest. Games and Economic Behavior, 62 (1), 93-99.

Ochs, J. (1995). The Handbook of Experimental Economics. Princeton University Press, in chapter: Coordination Problems, 195-251.

Orphanides, A., & Williams, J. (2005). The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations. Journal of Economic Dynamics and Control, 29(11), 1927-1950.

Schwarze, J.,Wunder, C., Herzog, B., & Krug, G. (2010). Welfare effects of the euro cash changeover. European Journal of Political Economy, 24(3), 571-586.

Sims, C. (2009). Inflation expectations, uncertainty and monetary policy. BIS Working Paper, No 275, March.

Swanson, E., & Gurkaynak, R., & Brian, T. (2007). Market-based measures of monetary policy expectations. Journal of Business & Economic Statistics, 25, 201-212.

von Neumann, J., & Morgenstern, O. (1953). Theory of Games and Economic Behavior. Princeton University Press.

Woodford, M. (2005). Central bank communication and policy effectiveness. NBER Working Paper, No. 11898.

Yukalov, V., & Sornette, D. (2011). Decision theory with prospect interference and entanglement. Theory and Decision, 70, 283-328.