Advanced Search
MyIDEAS: Login

Disagreement and Biases in Inflation Expectations

Contents:

Author Info

  • CARLOS CAPISTRÁN
  • ALLAN TIMMERMANN

Abstract

Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters' costs of over- and underpredicting inflation. Our model implies (i) biased forecasts, (ii) positive serial correlation in forecast errors, (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate, and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982. Copyright (c) 2009 The Ohio State University.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2009.00209.x
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 2-3 (03)
Pages: 365-396

as in new window
Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:365-396

Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
  2. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
  3. Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-49, June.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  5. Allan Timmermann & Andrew Patton, 2004. "Properties of Optimal Forecasts under Asymmetric Loss and Nonlinearity," Working Papers wp04-05, Warwick Business School, Finance Group.
  6. Carlos Capistrán, 2006. "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?," Working Papers 2006-14, Banco de México.
  7. Nicholas M. Kiefer & Timothy J. Vogelsang, 2002. "Heteroskedasticity-Autocorrelation Robust Standard Errors Using The Bartlett Kernel Without Truncation," Econometrica, Econometric Society, vol. 70(5), pages 2093-2095, September.
  8. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
  9. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
  10. Peter F. Christoffersen & Francis X. Diebold, 1994. "Optimal Prediction Under Asymmetric Loss," NBER Technical Working Papers 0167, National Bureau of Economic Research, Inc.
  11. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
  12. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 293-318, February.
  13. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research.
  14. Pesaran, M.H. & Weale, M., 2005. "Survey Expectations," Cambridge Working Papers in Economics 0536, Faculty of Economics, University of Cambridge.
  15. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
  16. Allan Timmermann & Graham Elliott & Ivana Komunjer, 2004. "Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss?," Econometric Society 2004 North American Summer Meetings 601, Econometric Society.
  17. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  18. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  19. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  20. Bonham, Carl S & Cohen, Richard H, 2001. "To Aggregate, Pool, or Neither: Testing the Rational-Expectations Hypothesis Using Survey Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 278-91, July.
  21. Victor Zarnowitz & Phillip Braun, 1994. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Working Papers 3965, National Bureau of Economic Research, Inc.
  22. Gordon, Stephen & St-Amour, Pascal, 1999. "A Preference Regime Model of Bull and Bear Markets," Cahiers de recherche 9906, Université Laval - Département d'économique.
  23. Marco Ottaviani & Peter Norman Sorensen, 2001. "The Strategy of Professional Forecasting," Discussion Papers 01-09, University of Copenhagen. Department of Economics.
  24. Patton, Andrew J. & Timmermann, Allan, 2007. "Testing Forecast Optimality Under Unknown Loss," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 1172-1184, December.
  25. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
  26. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  27. Robert Rich & Joseph Tracy, 2003. "Modeling uncertainty: predictive accuracy as a proxy for predictive confidence," Staff Reports 161, Federal Reserve Bank of New York.
  28. Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
  29. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  30. N. T. Valev & J. A. Carlson, 2003. "Sources of dispersion in consumer inflation forecasts," Applied Economics Letters, Taylor & Francis Journals, vol. 10(2), pages 77-81.
  31. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 21-40, February.
  32. Zellner, Arnold, 1986. "Biased predictors, rationality and the evaluation of forecasts," Economics Letters, Elsevier, vol. 21(1), pages 45-48.
  33. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers 10368, Iowa State University, Department of Economics.
  34. Christoffersen, Peter F & Diebold, Francis X, 1996. "Further Results on Forecasting and Model Selection under Asymmetric Loss," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 561-71, Sept.-Oct.
  35. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
  36. Dean Croushore, 1998. "Evaluating inflation forecasts," Working Papers 98-14, Federal Reserve Bank of Philadelphia.
  37. Timmermann, Allan G, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1135-45, November.
  38. Logue, Dennis E & Willett, Thomas D, 1976. "A Note on the Relation between the Rate and Variability of Inflation," Economica, London School of Economics and Political Science, vol. 43(17), pages 151-58, May.
  39. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:365-396. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.