Search Results
Working Paper
A Comprehensive Empirical Evaluation of Biases in Expectation Formation
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 ...
Working Paper
State-Dependent Sticky Expectations: Evidence and Theory
We document novel stylized facts regarding updating of households' inflation expectations. Using two randomized controlled trials fielded in the US and Germany where signals in the form of professionals' inflation forecasts have different perceived levels of precision, we show that households react more to information with higher levels of precision, in line with Bayesian updating. However, in contrast to Bayesian updating, they mostly respond differently to these signals in the decision to update expectations (extensive margin) and not in the size of the adjustment (intensive margin). The ...