Disagreement and Biases in Inflation Expectations |
| |
Authors: | CARLOS CAPISTRÁN ALLAN TIMMERMANN† |
| |
Institution: | Carlos Capistrán;is from Banco de México. Av. 5 de Mayo No. 18, 4o. Piso, Col. Centro, 06059, México DF, México (E-mail: ). Allan Timmermann;is Professor of Management and Economics, Rady School of Management and Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA 92093-0553, and CREATES, University of Aarhus (E-mail: ). |
| |
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 underpredicting 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: | C53 C82 E31 E37 |
|
|