 |
Measuring Biases in Expectation Formation
1 : University of Amsterdam [Amsterdam]
We develop a general framework for measuring biases in expectation formation. The basic insight is that biases can be inferred from the impulse response function of forecast errors. The method does not require knowing the true data-generating process and is straightforward to apply empirically. Our theoretical framework encompasses all major models of expectations, and it yields a set of new empirical predictions. In an application on inflation expectations, we (i) find underreaction in both individual and consensus forecasts; and (ii) use the new empirical predictions to rank the performance of different models.
