Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2018-06-21
Number: 18-058/IV
Author-Name: Florian Peters
Author-Email: f.s.peters@uva.nl
Author-Workplace-Name: University of Amsterdam
Author-Name: Simas Kucinskas
Author-Email: s.kucinskas@uva.nl
Author-Workplace-Name: University of Amsterdam
Title: Measuring Biases in Expectation Formation
Abstract: We develop a general framework for measuring biases in expectation formation. The method is based on the insight that biases can be inferred from the response of forecast errors to past news. Empirically, biases are measured by flexibly estimating the impulse response function of forecast errors. The framework does not require precise knowledge of the true data-generating process, and it nests all major existing models of expectations. Monte Carlo simulations show that the method is able to detect biases in empirically relevant settings. We illustrate the methodology using data on inflation forecasts. Our framework can guide future models of expectations.
Classification-JEL: C53; D83; D84; E70; G40
Keywords: expectation formation; bias; underreaction; overreaction
File-URL: https://papers.tinbergen.nl/18058.pdf
File-Format: application/pdf
File-Size: 473574 bytes
Handle: RePEc:tin:wpaper:20180058