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The straw that breaks the camel's back: inferential expectations and sudden belief changes

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dc.contributor.authorHenckel, Timoen
dc.contributor.authorMenzies, Gordon Den
dc.contributor.authorZizzo, Daniel Jen
dc.date.accessioned2026-01-12T08:43:43Z
dc.date.available2026-01-12T08:43:43Z
dc.date.issued2025-10-29en
dc.description.abstractWe propose a theory of abrupt shifts in beliefs—termed inferential expectations (IE)—to explain significant structural changes observed in economies. According to this theory, agents conduct hypothesis tests on economic fundamentals, holding firmly to their initial beliefs until the weight of contrarian evidence reaches a critical threshold, prompting a sudden and seemingly disproportionate revision of expectations. We explain the intuition behind this theory, refer to its microfoundations, and list examples of possible applications. We also simulate a simple 3-equation macro model to provide qualitative insight into the recent inflation surge and the policy dilemma it presents.en
dc.description.statusPeer-revieweden
dc.format.extent26en
dc.identifier.issn0013-0249en
dc.identifier.scopus105026719395en
dc.identifier.urihttps://hdl.handle.net/1885/733804170
dc.language.isoenen
dc.provenanceThis is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial License ( https://creativecommons.org/licenses/by-nc/4.0/) , which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact reprints@oup.com for reprints and translation rights for reprints. All other permissions can be obtained through our RightsLink service via the Permissions link on the article page on our site-for further information please contact journals.permissions@oup.comen
dc.rights©The Author( s) 2025. Published by Oxford University Press on behalf of The Oxford Review of Economic Policy Ltd. en
dc.sourceEconomic Recorden
dc.titleThe straw that breaks the camel's back: inferential expectations and sudden belief changesen
dc.typeJournal articleen
dspace.entity.typePublicationen
local.bibliographicCitation.lastpage451en
local.bibliographicCitation.startpage426en
local.contributor.affiliationHenckel, Timo; Research School of Economics, ANU College of Business & Economics, The Australian National Universityen
local.contributor.affiliationMenzies, Gordon D; Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, ANU College of Law, Governance and Policy, The Australian National Universityen
local.contributor.affiliationZizzo, Daniel J; Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, ANU College of Law, Governance and Policy, The Australian National Universityen
local.identifier.citationvolume41en
local.identifier.doi10.1093/oxrep/graf028en
local.identifier.pure9c550482-fee2-43d8-8db8-17faee6080e0en
local.type.statusPublisheden

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