Recognizing that the global financial crisis began a decade ago, the 2018 Summer Institute also included a day-long meeting on "The Global Financial Crisis @ 10." The conference included presentations on the role of extrapolative expectations
in inflating pre-crisis asset bubbles, the weaknesses of the pre-crisis financial system, post-crisis lessons on the stabilization role of fiscal policy, and lessons learned about macroprudential financial policy.
(16) House prices are affected negatively in the long run by the user cost of capital (interest rates less extrapolative expectations of house price inflation).
Part of the dynamic adjustment shown in this simulation is due to the incorporation of extrapolative expectations in the model.
Recognizing the role of extrapolative expectations in asset pricing will make monetary and macroprudential policy both more robust and more complex.
The same dynamic of extrapolative expectations also plays out in housing markets in the United States and abroad.
However, a particular version of such extrapolative expectations, namely, regressive expectations formation, does find support in the data.
These tests are reported in the next subsections, followed by tests of versions of what Pesaran and Weale (2006) refer to as extrapolative expectations.
Nevertheless, given the simplicity of our approach, we consider the predictions obtained by using this ad hoc form of extrapolative expectations interesting and worthy of more systematic pursuit.
We then evaluate the theory under the assumption that all available (but no future) information is used in an extrapolative expectations format to forecast future dividend payments.
The extrapolative expectations model does not allow people to make use of this information.
If the extrapolative expectations model is correct, forecasts ([F.sub.t+1]) should depend on the data points that immediately precede them ([X.sub.t]) and the regression coefficient associated with this relationship should be close to 1.
* David Hirshleifer, University of California, Irvine, and Jianfeng Yu, University of Minnesota, "Asset Pricing in Production Economies with Extrapolative Expectations