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Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts

Listed author(s):
  • Olivier Coibion

    ()

    (Department of Economics, College of William and Mary)

  • Yuriy Gorodnichenko

    ()

    (Department of Economics, University of California, Berkeley)

We propose a new approach to test of the null of full-information rational expectations which is informative about whether rejections of the null reflect departures from rationality or full-information. This approach can also quantify the economic significance of departures from the null by mapping them into the underlying degree of information rigidity faced by economic agents. Applying this approach to both U.S. and cross-country data of professional forecasters and other economic agents yields pervasive evidence of informational rigidities that can be explained by models of imperfect information. Furthermore, the proposed approach sheds new light on the implications of policies such as inflation-targeting and those leading to the Great Moderation on expectations. Finally, we document evidence of state-dependence in the expectations formation process. implications.

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File URL: http://economics.wm.edu/wp/cwm_wp102.pdf
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Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 102.

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Length: 52 pages
Date of creation: 08 Nov 2010
Handle: RePEc:cwm:wpaper:102
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