Uncertainty and Disagreement in Forecasting Inflation

Evidence from the Laboratory (Revised version of EBC DP 2011-014)

D. Pfajfar, B. Zakelj

Research output: Working paperDiscussion paperOther research output

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Abstract

Abstract: This paper compares the behavior of subjects' uncertainty in different monetary policy environments when forecasting inflation in the laboratory. We find that inflation targeting produces lower uncertainty and higher accuracy of interval forecasts than inflation forecast targeting. We also establish several stylized facts about the behavior of individual uncertainty, aggregate distribution of forecasts, and disagreement between individuals. We find that the average confidence interval is the measure that performs best in forecasting inflation uncertainty. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases and tend to report asymmetric confidence intervals, perceiving higher uncertainty with respect to inflation increases.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages66
Volume2012-018
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-018

Fingerprint

Uncertainty
Inflation forecasting
Confidence interval
Inflation uncertainty
Aggregate uncertainty
Stylized facts
Inflation forecasts
Inflation
Inflation targeting
Targeting
Monetary policy
Interval forecasts

Keywords

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

Cite this

Pfajfar, D., & Zakelj, B. (2012). Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Revised version of EBC DP 2011-014). (EBC Discussion Paper; Vol. 2012-018). Tilburg: EBC.
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Pfajfar, D & Zakelj, B 2012 'Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Revised version of EBC DP 2011-014)' EBC Discussion Paper, vol. 2012-018, EBC, Tilburg.

Uncertainty and Disagreement in Forecasting Inflation : Evidence from the Laboratory (Revised version of EBC DP 2011-014). / Pfajfar, D.; Zakelj, B.

Tilburg : EBC, 2012. (EBC Discussion Paper; Vol. 2012-018).

Research output: Working paperDiscussion paperOther research output

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AB - Abstract: This paper compares the behavior of subjects' uncertainty in different monetary policy environments when forecasting inflation in the laboratory. We find that inflation targeting produces lower uncertainty and higher accuracy of interval forecasts than inflation forecast targeting. We also establish several stylized facts about the behavior of individual uncertainty, aggregate distribution of forecasts, and disagreement between individuals. We find that the average confidence interval is the measure that performs best in forecasting inflation uncertainty. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases and tend to report asymmetric confidence intervals, perceiving higher uncertainty with respect to inflation increases.

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KW - Confidence Bounds

KW - New Keynesian Model

KW - Inflation Expectations

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