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Macroeconomic expectations, central bank communication, and background uncertainty: A COVID-19 laboratory experiment

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  • Petersen, Luba
  • Rholes, Ryan

Abstract

This paper explores the robustness of laboratory expectation formation and public signal credibility to external uncertainty shocks and online experimentation. We exploit the recent pandemic as a source of exogenous background uncertainty in a New Keynesian learning-to-forecast experiment (LtFE) where participants receive projections of varying precision about future inflation. We compare results from identical LtFE completed immediately before the onset of the pandemic, soon after (online), and well after (online and in-person). Baseline LtFEs with no communication are robust to both factors. However, both background uncertainty and online experimentation impact how subjects use public signals. The pandemic led to a decreased appetite for and tolerance of overly precise communication while increasing the efficacy of projections that also convey uncertainty. Subjects became more averse to central bank forecast errors after the onset of the pandemic if the central bank conveyed a precise outlook but not if it conveyed forecast uncertainty.

Suggested Citation

  • Petersen, Luba & Rholes, Ryan, 2022. "Macroeconomic expectations, central bank communication, and background uncertainty: A COVID-19 laboratory experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
  • Handle: RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922001658
    DOI: 10.1016/j.jedc.2022.104460
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    More about this item

    Keywords

    Expectations; Monetary policy; Inflation communication; Credibility; Laboratory experiment; Experimental macroeconomics; Uncertainty; Strategic; Coordination; COVID-19; Online experimentation;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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