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Inattention, Disagreement and Internal (In)Consistency of Inflation Forecasts

Author

Listed:
  • Fernando Borraz

    (Banco Central del Uruguay
    Departamento de Economía. Facultad de Ciencias Sociales. Universidad de la República (Uruguay))

  • Laura Zacheo

    (Banco Central del Uruguay)

Abstract

This paper uses a rich and unique data set with eight years of monthly inflation expectation and subjective probability distributions to analyze the expectation formation process of firms in Uruguay. First, firms exhibit a very high degree of attention to current inflation conditions which we link to the countries' historical inflation experience. Second, the forecasters fail to incorporate all of the available information and firms' forecasts are more accurate than those of professional forecasters in Uruguay. Third, there is disagreement between forecasters at the short run but also at the long run and the disagreement is higher for forecasters that revise than for forecasters that do not revise. Therefore, there must be some noise or friction that prevents agents that changes prices to get access to perfect information. Fourth, the disagreement is not fully explained by differences in the information set because one in five forecasts is not internal consistent.

Suggested Citation

  • Fernando Borraz & Laura Zacheo, 2018. "Inattention, Disagreement and Internal (In)Consistency of Inflation Forecasts," Documentos de trabajo 2018007, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2018007
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/7.2018.pdf
    File Function: First version, 2018
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    References listed on IDEAS

    as
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    6. Engelberg, Joseph & Manski, Charles F. & Williams, Jared, 2009. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 30-41.
    7. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    8. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    9. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    10. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-735, September.
    11. Clements, Michael P., 2014. "Probability distributions or point predictions? Survey forecasts of US output growth and inflation," International Journal of Forecasting, Elsevier, vol. 30(1), pages 99-117.
    12. Michael F. Bryan & Brent Meyer & Nicholas B. Parker, 2014. "The inflation expectations of firms: what do they look like, are they accurate, and do they matter?," FRB Atlanta Working Paper 2014-27, Federal Reserve Bank of Atlanta.
    13. Bonham, Carl & Cohen, Richard, 1995. "Testing the Rationality of Price Forecasts: Comment," American Economic Review, American Economic Association, vol. 85(1), pages 284-289, March.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Miguel Mello & Jorge Ponce, 2020. "Fiscal policy and inflation expectations," Documentos de trabajo 2020004, Banco Central del Uruguay.
    2. Fernando Borraz & Miguel Mello, 2020. "Communication, Information and Inflation Expectations," Documentos de trabajo 2020005, Banco Central del Uruguay.
    3. Fernando Borraz & Ana Caro & Maira Caño-Guiral & María José Roa, 2021. "Financial education for youth. A randomized evaluation in Uruguay," Documentos de trabajo 2021011, Banco Central del Uruguay.
    4. Monique B. Reid & Pierre L. Siklos, 2022. "How Firms and Experts View The Phillips Curve: Evidence from Individual and Aggregate Data from South Africa," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(12), pages 3355-3376, September.
    5. Carotta, Gianni & Mello, Miguel & Ponce, Jorge, 2023. "Monetary policy communication and inflation expectations: New evidence about tone and readability," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).

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    More about this item

    Keywords

    inflation expectation; inattention; disagreement; subjective probability distribution;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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