Heterogeneous Expectations and the Predictive Power of Econometric Models
Abstract
A recent literature questions the mainstream omniscient rational agent, suggesting that agents act as, and have the same bounded rationality of, econometricians. Heterogeneous expectations may then arise because of the different forecasting models used by individuals, who select disparate predictors according to the peculiar net benefits of each model. Net benefits are assumed to be a function of mean square forecasting errors (MSE). Consequently, as in Carroll’s epidemiological approach, an implicit assumption is that the level of disagreement across agents cannot Granger cause model-based MSE. Instead, survey expectations on GDP growth show that the information flow runs exclusively from heterogeneity to MSE. Moreover, variance decompositions point out that survey expectations entropy and MSE are not contemporaneously correlated, enforcing the detected causal chain. Results are robust to several predictors, nonlinearities, and suggest looking also at other possible causes of disagreement.Download Info
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Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 125.Length: 39 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:isa:wpaper:125
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Related research
Keywords: Survey Expectations; Forecasting Models.;Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-23 (All new papers)
- NEP-CBA-2010-10-23 (Central Banking)
- NEP-FOR-2010-10-23 (Forecasting)
References
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- Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
- John M. Roberts, 1994.
"Is inflation sticky?,"
Working Paper Series / Economic Activity Section
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- Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
- Spencer, David E, 1989. "Does Money Matter? The Robustness of Evidence from Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 442-54, November.
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