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This paper investigates the empirical validity of two well-known approaches to modelling expectations in economic literature, i.e. rational expectations and adaptive learning. Survey data on consumers’ inflation expectations for four emerging Central and Eastern European economies with an inflation targeting monetary policy regime, i.e. Romania, Czech Republic, Poland and Hungary, is used. The empirical evidence doesn’t support the rationality hypothesis of inflation expectations. In case of adaptive learning approach, the results suggest that constant gain learning algorithm provides a better description of inflation expectations than the recursive least squares algorithm, a possible explanation being the fact that it allows economic agents to incorporate structural changes, frequent in emerging economies, faster. Also there is evidence that consumers from Romania and Hungary use simple models to forecast inflation, that includes only a constant and the lagged inflation as determinants, while in case of Poland and Czech Republic the best fit is obtained for models that also includes other explanatory variables.

Learning Dynamics and the Rationality of Inflation Expectations in CEE Countries