Ruhr Economic Papers

Ruhr Economic Papers #528

Do Macroeconomic Shocks Affect Intuitive Inflation Forecasting? An Experimental Investigation

by Marvin Deversi

RUB, 12/2014, 51 S./p., 8 Euro, ISBN 978-3-86788-604-8 DOI: 10.4419/86788604

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Abstract

In an experimental setting impulse-response behaviour in intuitive inflation forecasting is analysed. Participants were asked to forecast future values of inflation for a fictitious economy after receiving charts and lists of past values of inflation and output gap. Thirty periods were forecasted stepwise and feedback on performance was provided after each period. In a between subjects design, participants experienced a negative or positive supply shock. The results suggest that participants barely report rational forecasts. Instead, simple backward-looking rules describe stated forecast series. Forecasting is heterogeneous across agents and over time. Before the shock, most participants can be described by natural expectations. Due to the shocks 69% of participants are found to switch their forecasting rule. After the negative supply shock, subjects increase efficiency of forecasts. But, after a positive supply shock efficiency drops down to zero; this is evidence for a negativity bias. As a main result, macroeconomic shocks do alter the way experimental participants form intuitive inflation forecasts, however, to what extent depends on the shocks’ characteristics.

JEL-Classification: C91, D84, E03

Keywords: Macroeconomic experiment; inflation expectations; intuitive forecasting; shocks; heterogeneity

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