Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Macroeconomic Experiments

Abstract

This article explores the importance of accessible and focal information in influencing beliefs and attention in a learning-to-forecast laboratory experiment where subjects are incentivized to form accurate expectations about inflation and the output gap. We consider the effects of salient and accessible forecast error information and learning on subjects’ forecasting accuracy and heuristics, and on aggregate stability. Experimental evidence indicates that, while there is considerable heterogeneity in the heuristics used, subjects’ forecasts can be best described by a constant gain learning model where subjects respond to forecast errors. Salient forecast error information reduces subjects’ overreaction to their errors and leads to greater forecast accuracy, coordination of expectations, and macroeconomic stability. The benefits of this focal information are short-lived and diminish with learning.

Citation

Petersen, L. (2014), "Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Macroeconomic Experiments", Experiments in Macroeconomics (Research in Experimental Economics, Vol. 17), Emerald Group Publishing Limited, Bingley, pp. 109-137. https://doi.org/10.1108/S0193-230620140000017004