The effects of professional forecast dissemination on macroeconomic volatility

Sacha Gelfer

Journal of Economic Behavior & Organization, 2020, vol. 170, issue C, 131-156

Abstract: This paper explores the role that professional forecast announcements can have on macroeconomic volatility. Bounded rational agents are used inside a medium scale dynamic stochastic general equilibrium (DSGE) model with financial frictions. Modeled agents must form expectations about endogenous variables by selecting between three simple linear forecasting specifications some of which contain the inclusion of a“professionally” announced forecast of the economic variable. Historically calibrated simulations of the model show that the usage of the announced professional forecast by the agents in their adaptive learning forecast specifications can reduce the volatility in consumption, inflation and wages by as much as 26%, 23% and 22% respectively. However, if the professional forecast is not disseminated well to the agents or biased in its dissemination, agents will learn to ignore the announcement and macroeconomic volatility will increase. Further, the inclusion of very noisy professional forecast signals can result in “coordinated volatility cascades” where agents could reduce macroeconomic volatility by ignoring the professional forecast but choose not to because of its previous forecast performance.

Keywords: Adaptive learning; Simulated DSGE model; Financial accelerator; Survey of professional forecasters (search for similar items in EconPapers)
JEL-codes: D83 D84 E02 E17 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:170:y:2020:i:c:p:131-156

DOI: 10.1016/j.jebo.2019.11.031

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