Abstract
This paper attempts to identify whether the inflation expectation formation models adopted by Chinese agents are heterogeneous or homogeneous. A Gaussian mixture model is developed assuming that agents form inflation expectations by selecting a model from alternatives. Analysis results reveal that only adaptive expectation (AE) model is significant, indicating that both households and financial participants are fairly homogeneous in selecting inflation expectation formation models. Therefore, the mechanism of heterogeneous models is inoperative in explaining the heterogeneous inflation expectations in China, and the AE is the main driver of Chinese agents’ perceptions about cost.
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