Disagreement and Biases in Inflation Expectations
Author | : Carlos Capistrán |
Publisher | : |
Total Pages | : 55 |
Release | : 2008 |
ISBN-10 | : OCLC:1290294687 |
ISBN-13 | : |
Rating | : 4/5 (87 Downloads) |
Download or read book Disagreement and Biases in Inflation Expectations written by Carlos Capistrán and published by . This book was released on 2008 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.