Working Paper: NBER ID: w16537
Authors: Olivier Coibion; Yuriy Gorodnichenko
Abstract: We propose a new approach to test of the null of full-information rational expectations which is informative about whether rejections of the null reflect departures from rationality or full-information. This approach can also quantify the economic significance of departures from the null by mapping them into the underlying degree of information rigidity faced by economic agents. Applying this approach to both U.S. and cross-country data of professional forecasters and other economic agents yields pervasive evidence of informational rigidities that can be explained by models of imperfect information. Furthermore, the proposed approach sheds new light on the implications of policies such as inflation-targeting and those leading to the Great Moderation on expectations. Finally, we document evidence of state-dependence in the expectations formation process.
Keywords: Expectations; Information Rigidity; Macroeconomics; Monetary Policy
JEL Codes: E2; E3; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forecast revisions (C53) | ex post mean forecast errors (C51) |
| information rigidity (L15) | forecast errors (C53) |
| degree of information rigidity (L15) | average duration between information updates (C41) |
| persistence of macroeconomic variable (E39) | degree of information rigidity (L15) |
| signal-to-noise ratio (C52) | degree of information rigidity (L15) |
| central bank independence (E58) | information rigidity (L15) |
| inflation targeting (E31) | degree of inattention among forecasters (C53) |
| economic shocks (F69) | degree of information rigidity (L15) |