Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Replaced by CentER DP 2012-072)

D. Pfajfar, B. Zakelj

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Abstract

We establish several stylized facts about the behavior of individual uncertainty and disagreement between individuals when forecasting inflation in the laboratory. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases, which can be interpreted as the overconfidence bias. Determinants of individual uncertainty, dis- agreement among forecasters and properties of aggregate distribution are analyzed. We find that the interquartile range of the aggregate distribution has the highest correlation with inflation variability; however the average confidence interval performs best in a forecasting exercise. Allowing subjects to insert asymmetric confidence intervals results in wider upper intervals than lower intervals on average, thus perceiving higher uncertainty with respect to inflation increases. In different treatments we study the influence of different monetary policy designs on the formation of confidence bounds. Inflation targeting produces lower uncertainty and higher accuracy of intervals than inflation forecast targeting.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Volume2011-053
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-053

Keywords

  • Laboratory Experiments
  • Confidence Bounds
  • New Keynesian Model
  • Inflation Expectations

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    Pfajfar, D., & Zakelj, B. (2011). Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Replaced by CentER DP 2012-072). (CentER Discussion Paper; Vol. 2011-053). Economics.