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Disagreement and Biases in Inflation Expectations
Author(s) -
CAPISTRÁN CARLOS,
TIMMERMANN ALLAN
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00209.x
Subject(s) - inflation (cosmology) , predictability , survey of professional forecasters , econometrics , economics , variance (accounting) , sign (mathematics) , rational expectations , dispersion (optics) , monetary policy , statistics , keynesian economics , mathematics , mathematical analysis , physics , accounting , theoretical physics , optics
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.