Overreaction in Macroeconomic Expectations
Pedro Bordalo, Nicola Gennaioli, Yueran Ma, Andrei Shleifer
American Economic Review · 2020 · Volume 110 · Issue 9
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.
Keywords
Forecasting Models, Simulation Methods, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Expectations, Speculations, General Aggregative Models: Neoclassical, General Aggregative Models: Forecasting and Simulation: Models and Applications, Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications, Money and Interest Rates: Forecasting and Simulation: Models and Applications
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