J_Ryngaert_Inflation_Expectations-1
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J_Ryngaert_Inflation_Expectations-1
What Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1nderstanding of information frictions in expectations. I first propose a new framework for estimating noisy information using individual forecasts. I furt her extend this framework to incorporate mispercept ions on the part of economic agents about the persistence of the underlying process being for J_Ryngaert_Inflation_Expectations-1ecasted. Applying this framework to the U.S. inflation forecasts of professional forecasters points toward significantly less noisy information than pJ_Ryngaert_Inflation_Expectations-1
revious estimates suggest but. reveals a systematic underestimation on the part of forecasters of the persistence of inflation. Using a structural modWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1xpectations formation process of these agents. The results indicate that, even for professional forecasters, t here are multiple forces that generate economically significant deviations from full information..IEL Classification: E31, DX3, Ds iKeywords: inflation dynamics, inflation expectations, noi J_Ryngaert_Inflation_Expectations-1sy information, parameter misperception, inflation persistence’ I thank Olivier Ccnbion, Saroj Dhattarai, and Tara Sinclair for their invaluable guidaJ_Ryngaert_Inflation_Expectations-1
nce and support.. 1 also Ix-nefitcd from conversations with Andrew Glover, Christoph lỉoehin. Garrett Hageman 11, Jeffrey Campbell, Spencer Krone, LeoWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1ral Reserve bank of Chicago.’ Wake Forest University, Department of Economics, IỈOX 7505, Winston-Salem, NC 27109; (e-mail: ryn-gaejnr nwfu.cdi i)https://khothuvien.cori!1 IntroductionExpectations arc a ubiquitous feat ure of macroeconomic models. Economic expectations and particularly expectations J_Ryngaert_Inflation_Expectations-1of the inflation rate, affect all manner of economic decisions. Firms must anticipate future costs and prices in sotting t heir own prices and househoJ_Ryngaert_Inflation_Expectations-1
lds must consider the path of future prices when planning the timing of purchases and borrowing. As the link between expectations and actions is so peWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1gents form t heir expectations and t he constraints they face in doing so.Economists arc increasingly using models relaxing the full information assumption of rational expectation models and limiting forecaster access to information. Agents in the sticky information model of Mankiw and Reis (2002) m J_Ryngaert_Inflation_Expectations-1ust pay fixed costs to obtain now information and therefore do so only periodieally. Deviat ions from full information rational expectat ions in an agJ_Ryngaert_Inflation_Expectations-1
ent's forecast come from the fact that, in any period that she docs not update, she based her entire expectation on outdated informat ion. In a secondWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1bserve the variable she is t rying to forecast. Observing only signals about, the fundamental rather than the fundamental itself, the forecaster engages in optimal signal processing ami at least a portion of her new expectation is formed with dated information. While these models introduce constrain J_Ryngaert_Inflation_Expectations-1ts into the expectations formation process, they take for granted that. Agents understand the structure of the economy and therefore form expectationsJ_Ryngaert_Inflation_Expectations-1
that, though partly out-of-date, arc model-consistent. If forecasters face constraints in information collection and processing, it Is reasonable to What Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1ly with the ultimate goal of estimating the size and importance of each channel. 1 find that, both noisy signals about inflation and misperceptions of the structural parameters governing inflation dynamics lead to economically significant deviations from full information rational expectations.The fi J_Ryngaert_Inflation_Expectations-1rst contribution of this paper is to develop a new framework for estimating noisy in1 Thomas Sargent noted the implausibility of rational expectationsJ_Ryngaert_Inflation_Expectations-1
with the following critque: "rational expectations models impute much more knowledge to the agents within the model ... than is possessed by an econoWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1ofessional forecasts. Information frictions in the noisy information model derive from the inability of agents to olxserve inflation in real time and the resulting individual specific error in observations of inflation. Recent approaches to estimating these fric Lions rely (HI mean forecasts, thus a J_Ryngaert_Inflation_Expectations-1veraging across these individual signals and canceling out the variation that (hives the need for signal processing. My approach instead utilizes thesJ_Ryngaert_Inflation_Expectations-1
e id iusyncratic signals and exploits both individual and time variation in forecast errors. Estimation using this approach results in a substantial eWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1960s. 1 find estimates of noisy information implying that forecasters weigh new signals slightly more than they weigh prior beliefs in forming their expectations. As they still form almost half of their expectation with dated information, observation constraints constitute a relevant source of frict J_Ryngaert_Inflation_Expectations-1ions that will affect, macroeconomic dynamics. I then show that the individual approach to estimation produces economically different results than theJ_Ryngaert_Inflation_Expectations-1
more commonly used approach focusing on mean forecasts. The baseline noisy informal ion model cannot account, for this difference across estimation aWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1tion frictions to the noisy information model. An extension of the noisy information model allows the agents to incorrectly perceive the structural parameters of the inflation process.2 I derive the predicted path of forecast, errors given both frictions: noisy signals and mistaken parameters. This J_Ryngaert_Inflation_Expectations-1provides a simple framework that can simultaneously quantify the effect of noisy information as well as the magnitude and direction of forecaster mispJ_Ryngaert_Inflation_Expectations-1
erception of parameters. My approach shows that since the late 1960s, forecasters have on average un derestimated inflation persistence. This underestWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1ucture of individual professional forecasts that forecasters mlspcrccive the parameters of t he inflation process. This predict ion is in line with recent literat ure demonstrat ing forecaster underestimation of persistence, c.g. Jain (2017).The third contribution of t his paper is to build a simple J_Ryngaert_Inflation_Expectations-1 structural model t hat can lie used to quantify the relative importance of each friction in explaining the predictability of forecast’This can lie inJ_Ryngaert_Inflation_Expectations-1
terpreted ill dll' context of the learning literature where agents form inferences alxmt st mi l lira] parameters. My paper looks primarily at the effWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1s seen in the data. The model can be used to simultaneously estimate inflation persistence, forecaster misperception of persistence, and the strength of the noisy information friction. These estimates support the findings of the rest of the paper that, forecasters both face real-time information con J_Ryngaert_Inflation_Expectations-1straints and underestimate inflation persistence. These estimates further show that information is much less noisy than previous estimates of the noisJ_Ryngaert_Inflation_Expectations-1
y information friction (that do not lake the misperception friction into account) suggest.3 The st ructural estimates imply that forecasters base as mWhat Do (and Don't) Forecasters Know About U.S. Inflation?*.Jane RyngaerdSeptember 7. 2018AbstractThis paper contributes to and extends our current un J_Ryngaert_Inflation_Expectations-1ecasters still face an economically relevant observation frict ion, they respond more to now signals than previous literature reports. However, the underestimation of inflation persist ence creat es another relevant friction for expectations formation as forecast ers will project, the state forward J_Ryngaert_Inflation_Expectations-1using the wrong transition equation. Even in the case where t heir signals arc highly credible, forecasters will make the wrong projections about theJ_Ryngaert_Inflation_Expectations-1
future path of inflation and fail to recognize t he longevity of shocks to inflat ion.Jointly, my results suggest that., even for professional forecasGọi ngay
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