Forecaster (Mis-)Behavior

Tobias Broer and Alexandre N. Kohlhas
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Tobias Broer: Paris School of Economics
Alexandre N. Kohlhas: University of Oxford

The Review of Economics and Statistics, 2024, vol. 106, issue 5, 1334-1351

Abstract: We document two stylized facts in expectational survey data. First, professional forecasters overrevise their macroeconomic expectations. Second, such overrevisions mask evidence of both over- and underreactions to public signals. We show that the first fact is inconsistent with standard models of noisy rational expectations, but consistent with behavioral and strategic models. The second fact, in contrast, presents a puzzle for existing theories. We propose an extension of noisy rational expectations that allows forecasters to be overconfident in their information. We show that this feature when combined with the endogeneity of public signals leads to over- and undereactions consistent with the data.

Date: 2024
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