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

Luba Petersen and Ryan Rholes

Journal of Economic Dynamics and Control, 2022, vol. 143, issue C

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.

Keywords: Expectations; Monetary policy; Inflation communication; Credibility; Laboratory experiment; Experimental macroeconomics; Uncertainty; Strategic; Coordination; COVID-19; Online experimentation (search for similar items in EconPapers)
JEL-codes: C9 D84 E52 E58 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922001658

DOI: 10.1016/j.jedc.2022.104460

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