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Disagreement and Biases in Inflation Expectations


  • Carlos Capistrán
  • Allan Timmermann


Recent empirical work documents substantial disagreement in inflation expectations obtained from survey data. Furthermore, the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters' costs of over- and under-predicting inflation. Our model implies biased forecasts with positive serial correlation in forecast errors and a cross-sectional dispersion that rises with the level and the variance of the inflation rate. It also implies that biases in forecasters' ranks should be preserved over time and that forecast errors at different horizons can be predicted through the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters

Suggested Citation

  • Carlos Capistrán & Allan Timmermann, 2006. "Disagreement and Biases in Inflation Expectations," Computing in Economics and Finance 2006 3, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:3

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    References listed on IDEAS

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    More about this item


    Inflation Expectations; Heterogeneity; Asymmetric Loss; Forecast Evaluation;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation


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