Uncertainty in forecasting inflation and monetary policy design: Evidence from the laboratory

Damjan Pfajfar and Blaž Žakelj

International Journal of Forecasting, 2016, vol. 32, issue 3, 849-864

Abstract: This paper designs a laboratory experiment for studying subjects’ uncertainty regarding inflation in different monetary policy environments. We find that the contemporaneous Taylor rule produces a lower uncertainty and higher accuracy of interval forecasts than the forward-looking Taylor rule. The latter also produces a lower uncertainty when the reaction coefficient is high, 4, than rules with lower reaction coefficients, 1.5 and 1.35. Subjects perceive the underlying inflation uncertainty correctly in only 60% of cases, and tend to report asymmetric confidence intervals, perceiving a higher level of uncertainty with respect to inflation increases.

Keywords: Inflation uncertainty; Laboratory experiments; Monetary policy; Confidence bounds; New Keynesian model (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:32:y:2016:i:3:p:849-864

DOI: 10.1016/j.ijforecast.2016.01.005

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