Over-reaction in Macroeconomic Expectations

Pedro Bordalo, Nicola Gennaioli, Yueran Ma and Andrei Shleifer

No 24932, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the rationality of individual and consensus professional forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), which examines predictability of forecast errors from forecast revisions. We report two key findings: forecasters typically over-react to their individual news, while consensus forecasts under-react to average forecaster news. To reconcile these findings, we combine the diagnostic expectations model of belief formation from Bordalo, Gennaioli, and Shleifer (2018) with Woodford’s (2003) noisy information model of belief dispersion. The forward looking nature of diagnostic expectations yields additional implications, which we also test and confirm. A structural estimation exercise indicates that our model captures important variation in the data, yielding a value for the belief distortion parameter similar to estimates obtained in other settings

JEL-codes: E03 E17 E32 E37 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-mac
Note: AP EFG
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Citations: View citations in EconPapers (52)

Published as Pedro Bordalo & Nicola Gennaioli & Yueran Ma & Andrei Shleifer, 2020. "Overreaction in Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 110(9), pages 2748-2782, September.

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