Overreaction in Macroeconomic Expectations

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, w...

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Bibliographic Details
Published in:The American economic review 2020-09, Vol.110 (9), p.2748-2782
Main Authors: Bordalo, Pedro, Gennaioli, Nicola, Ma, Yueran, Shleifer, Andrei
Format: Article
Language:English
Subjects:
Analysis
Economic forecasting
Forecasts and trends
Irrationalism (Philosophy)
Macroeconomics
Media coverage
Psychological aspects
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20181219