Disagreement and Biases in Inflation Expectations

Carlos Capistrán () and Allan Timmermann

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters’ costs of over- and under-predicting inflation. Our model implies (i) biased forecasts; (ii) positive serial correlation in forecast errors; (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate; and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982.

Keywords: asymmetric loss; real-time data; survey expectations (search for similar items in EconPapers)
JEL-codes: C53 C82 E31 E37 (search for similar items in EconPapers)
Pages: 53
Date: 2008-09-19
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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https://repec.econ.au.dk/repec/creates/rp/08/rp08_56.pdf (application/pdf)

Related works:
Journal Article: Disagreement and Biases in Inflation Expectations (2009)
Working Paper: Disagreement and Biases in Inflation Expectations (2006)
Working Paper: Disagreement and Biases in Inflation Expectations (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2008-56

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