Overreaction in Macroeconomic Expectations
- (pp. 2748-82)
Abstract
We study the rationality of individual and consensus forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), who examine predictability of forecast errors from forecast revisions. We find that individual forecasters typically overreact to news, while consensus forecasts underreact relative to full-information rational expectations. We reconcile these findings within a diagnostic expectations version of a dispersed information learning model. Structural estimation indicates that departures from Bayesian updating in the form of diagnostic overreaction capture important variation in forecast biases across different series, yielding a belief distortion parameter similar to estimates obtained in other settings.Citation
Bordalo, Pedro, Nicola Gennaioli, Yueran Ma, and Andrei Shleifer. 2020. "Overreaction in Macroeconomic Expectations." American Economic Review, 110 (9): 2748-82. DOI: 10.1257/aer.20181219Additional Materials
JEL Classification
- C53 Forecasting Models; Simulation Methods
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
- E13 General Aggregative Models: Neoclassical
- E17 General Aggregative Models: Forecasting and Simulation: Models and Applications
- E27 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- E47 Money and Interest Rates: Forecasting and Simulation: Models and Applications