Working Paper: NBER ID: w24932
Authors: Pedro Bordalo; Nicola Gennaioli; Yueran Ma; Andrei Shleifer
Abstract: 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
Keywords: macroeconomic expectations; forecasting; rational expectations; overreaction; underreaction
JEL Codes: E03; E17; E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individual forecast revisions (C53) | Future forecast errors (C53) |
| Consensus forecasts (E17) | Future forecast errors (C53) |
| Individual news (Z00) | Individual forecast revisions (C53) |
| Average forecaster news (G17) | Consensus forecasts (E17) |
| Belief distortions (D83) | Forecast errors (C53) |