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In this paper, we integrate heterogeneous inflation expectations into a simple monetary model.
Guided by empirical evidence, we assume that boundedly rational agents, selecting between extrapolative
and regressive forecasting rules to predict the future inflation rate, prefer rules that have
produced low prediction errors in the past. We show that integrating this behavioral expectation
formation process into the monetary model leads to the possibility of endogenous macroeconomic
dynamics. For instance, our model replicates certain empirical regularities such as irregular growth
cycles or inflation persistence. Moreover, we observe multi-stability via a Chenciner bifurcation.
In this paper we integrate heterogeneous inflation expectations into a simple monetary
model. Guided by empirical evidence we assume that boundedly rational agents, selecting
between extrapolative and regressive forecasting rules to predict the future inflation rate,
prefer rules that have produced low prediction errors in the past. We show that integrating
this behavioral expectation formation process into the monetary model leads to the
possibility of endogenous macroeconomic dynamics. For instance, our model replicates
certain empirical regularities such as irregular growth cycles or inflation persistence.
Moreover, we observe multi-stability via a Chenciner bifurcation.