Disagreement and Biases in Inflation Expectations

Allan Timmermann and Carlos Capistrán ()

No 2006-07, Working Papers from Banco de México

Abstract: Recent empirical work documents substantial disagreement in inflation expectations obtained from survey data. Furthermore, the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters' costs of over- and under-predicting inflation. Our model implies biased forecasts with positive serial correlation in forecast errors and a cross sectional dispersion that rises with the level and the variance of the inflation rate. It also implies that biases in forecasters' ranks should be preserved over time and that forecast errors at different horizons can be predicted through the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters.

JEL-codes: C53 E31 E37 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Disagreement and Biases in Inflation Expectations (2009)
Working Paper: Disagreement and Biases in Inflation Expectations (2008)
Working Paper: Disagreement and Biases in Inflation Expectations (2006)
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