Over-reaction in Macroeconomic Expectations

Bordalo, Pedro, Gennaioli, Nicola, Ma, Yeuran and Shleifer, Andrei Over-reaction in Macroeconomic Expectations. National Bureau of Economic Research.


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

Item Type: Other Working Paper
Keywords: finance
Subject(s): Finance
Date Deposited: 18 Sep 2018 14:49
Last Modified: 09 Oct 2018 10:25
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6902

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