A Comprehensive Empirical Evaluation of Biases in Expectation Formation

Kenneth Eva and Fabian Winkler

No 2023-042, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We revisit predictability of forecast errors in macroeconomic survey data, which is often taken as evidence of behavioral biases at odds with rational expectations. We argue that to reject rational expectations, one must be able to predict forecast errors out of sample. However, the regressions used in the literature often perform poorly out of sample. The models seem unstable and could not have helped to improve forecasts with access only to available information. We do find some notable exceptions to this finding, in particular mean bias in interest rate forecasts, that survive our out-of-sample tests. Our findings help narrow down the set of biases that merit closer attention of researchers in behavioral macroeconomics.

Keywords: behavioral bias; forecasting; out-of-sample prediction; rational expectations; survey data (search for similar items in EconPapers)
JEL-codes: C53 D84 E37 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-06-14
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:fip:fedgfe:96644

DOI: 10.17016/FEDS.2023.042

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