We propose an expectations formation mechanism (EFM) aimed to explain the median – hence lay – forecaster’s year-ahead inflation predictions. The EFM is a time-varying combination of long-run expectations, current inflation and uncertainty with weights naively calibrated according to...

Standard dynamic stochastic general equilibrium (DSGE) models are populated by fully-informed-optimising Muth-rational agents. This kind of agent is at odds with well-known psychological biases, not to mention real life people. In particular, there are strong theoretical and empirical reasons to...