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The effects of professional forecast dissemination on macroeconomic volatility

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  • Gelfer, Sacha

Abstract

This paper explores the role that professional forecast announcements can have on macroeconomic volatility. Bounded rational agents are used inside a medium scale dynamic stochastic general equilibrium (DSGE) model with financial frictions. Modeled agents must form expectations about endogenous variables by selecting between three simple linear forecasting specifications some of which contain the inclusion of a“professionally” announced forecast of the economic variable. Historically calibrated simulations of the model show that the usage of the announced professional forecast by the agents in their adaptive learning forecast specifications can reduce the volatility in consumption, inflation and wages by as much as 26%, 23% and 22% respectively. However, if the professional forecast is not disseminated well to the agents or biased in its dissemination, agents will learn to ignore the announcement and macroeconomic volatility will increase. Further, the inclusion of very noisy professional forecast signals can result in “coordinated volatility cascades” where agents could reduce macroeconomic volatility by ignoring the professional forecast but choose not to because of its previous forecast performance.

Suggested Citation

  • Gelfer, Sacha, 2020. "The effects of professional forecast dissemination on macroeconomic volatility," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 131-156.
    • Handle: RePEc:eee:jeborg:v:170:y:2020:i:c:p:131-156
    DOI: 10.1016/j.jebo.2019.11.031
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    More about this item

    Keywords

    Adaptive learning; Simulated DSGE model; Financial accelerator; Survey of professional forecasters;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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