Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Replaced by CentER DP 2012-072)
AbstractWe establish several stylized facts about the behavior of individual uncertainty and disagreement between individuals when forecasting inflation in the laboratory. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases, which can be interpreted as the overconfidence bias. Determinants of individual uncertainty, dis- agreement among forecasters and properties of aggregate distribution are analyzed. We find that the interquartile range of the aggregate distribution has the highest correlation with inflation variability; however the average confidence interval performs best in a forecasting exercise. Allowing subjects to insert asymmetric confidence intervals results in wider upper intervals than lower intervals on average, thus perceiving higher uncertainty with respect to inflation increases. In different treatments we study the influence of different monetary policy designs on the formation of confidence bounds. Inflation targeting produces lower uncertainty and higher accuracy of intervals than inflation forecast targeting.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-053.
Date of creation: 2011
Date of revision:
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Web page: http://center.uvt.nl
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-30 (All new papers)
- NEP-CBA-2011-05-30 (Central Banking)
- NEP-EXP-2011-05-30 (Experimental Economics)
- NEP-FOR-2011-05-30 (Forecasting)
- NEP-MON-2011-05-30 (Monetary Economics)
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- Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.
- Cristian Badarinza & Marco Buchmann, 2011. "Macroeconomic vulnerability and disagreement in expectations," Working Paper Series 1407, European Central Bank.
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