The Importance of Time-Series Extrapolation for Macroeconomic Expectations

Abstract

Abstract:This paper presents a simple experiment on how laypeople form macroeconomic expectations. Subjects have to forecast inflation and GDP growth. By varying the information provided in different treatments, we can assess the importance of historical time-series information versus information acquired outside the experimental setting such as knowledge of expert forecasts. It turns out that the availability of historical data has a dominant impact on expectations and wipes out the influence of outside-lab information completely. Consequently, backward-looking behavior can be identified unambiguously as a decisive factor in expectation formation. 1 We thank James C. Cox, Robert Sugden, Dennis Snower, Daniel Zizzo, and seminar participants in Atlanta, Berlin, Kiel, Innsbruck, and Norwich for helpful comments. We are also grateful to an anonymous referee who helped improving the paper. Any remaining weaknesses are of course ours. AbstractThis paper presents a simple experiment on how laypeople form macroeconomic expectations. Subjects have to forecast in ‡ation and GDP growth. By varying the information provided in di¤erent treatments, we can assess the importance of historical time-series information versus information acquired outside the experimental setting such as knowledge of expert forecasts. It turns out that the availability of historical data has a dominant impact on expectations and wipes out the in ‡uence of outside-lab information completely.Consequently, backward-looking behavior can be identi…ed unambiguously as a decisive factor in expectation formation.

Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments

“…This framework builds upon several previous experimental studies (e.g., Bruine de Bruin, van der Klaauw, and Topa 2011; Roos and Schmidt 2012;and Armantier et al 2016), and it introduces innovations aimed at testing new hypotheses and addressing the concern of spurious learning.…”

“…For example, studies by Roos and Schmidt (2012) and Armantier et al (2016) examine how individuals react to information about US inflation statistics by adjusting their reported inflation perceptions. Bruine de Bruin, van der Klaauw, and Topa (2011) show that subjects who are asked to think about products with extreme price changes tend to report high inflation expectations.…”

“…Some studies have measured the role of inflation statistics, exploiting media coverage of statistics (Lamla and Lein 2008, Badarinza and Buchmann 2009, and Dräger 2011, the publication of official statistics (Carrillo and Emran 2012), and information provision experiments (Roos andSchmidt 2012, Armantier et al 2016). Other studies have looked at the role of personal experiences.…”

Monetary Policy and Cyclical Systemic Risk - Friends or Foes?

“…Such trend extrapolation approach was used for example by Ross andSchmidt (2011), Blanchard et al (2015) and reflects accommodative inflation expectations. In case of medium-term monetary policy strategy (for example in Poland since 1998 to 2004) the inflation target in the each quarter was set up based on the logarithmic interpolation.…”

How transparent about its inflation target should a central bank be?

“…It should be further noted, as illustrated in Section 3.2, that this design of non-IT results in the same amount of heterogeneity in expectations under IT and non-IT by construction (for given values of P target and ζ ), which allows for a fair comparison of their relative performances. Third, as stressed in an experimental study by Roos and Schmidt (2012), past trends of macroeconomic variables are a key determinant of forecasts when laypeople, such as households, are concerned. Eventually, the specification we use translates the Keynesian notion of "market sentiment", which has been modelled in the context of monetary policy by Canzian (2009) or De Grauwe (2011.…”