Market Participants Neither Commit Predictable Errors nor Conform to REH: Evidence from Survey Data of Inflation Forecasts

Roman Frydman () and Josh Stillwagon ()
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Roman Frydman: New York University

No inetwp163, Working Papers Series from Institute for New Economic Thinking

Abstract: We develop a novel characterization of participants` forecasts with a mixture of normal variables arising from a Markov component. Using this characterization, we formulate five behavioral specifications, including four implied by the diagnostic expectations approach, as well as three implied by REH, and derive several new predictions for Coibion and Gorodnichenko`s regression of forecast errors on forecast revisions. Predictions of all eight specifications are inconsistent with the observed instability of individual CG regressions` coefficients, based on inflation forecasts from 24 professionals. Our findings suggest how to build on key insights of the REH and behavioral approaches in specifying individuals` forecasts.

Keywords: Diagnostic Expectations; Rational Expectations; Model Selection; Structural Change; Inflation Forecasts` Survey (search for similar items in EconPapers)
JEL-codes: C52 D80 D83 D91 E31 E71 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2021-09-01
New Economics Papers: this item is included in nep-mac, nep-mon, nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp163

DOI: 10.36687/inetwp163

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