Overreaction in Macroeconomic Expectations

Pedro Bordalo, Nicola Gennaioli, Yueran Ma and Andrei Shleifer

American Economic Review, 2020, vol. 110, issue 9, 2748-82

Abstract: We study the rationality of individual and consensus forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), who examine predictability of forecast errors from forecast revisions. We find that individual forecasters typically overreact to news, while consensus forecasts underreact relative to full-information rational expectations. We reconcile these findings within a diagnostic expectations version of a dispersed information learning model. Structural estimation indicates that departures from Bayesian updating in the form of diagnostic overreaction capture important variation in forecast biases across different series, yielding a belief distortion parameter similar to estimates obtained in other settings.

JEL-codes: C53 D83 D84 E13 E17 E27 E47 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (139)

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Working Paper: Over-reaction in Macroeconomic Expectations (2018)
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DOI: 10.1257/aer.20181219

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