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Expectations and information in the United States, 1982-2011: An empirical examination of inflation forecasting between professionals and households. /
Swansea University Author: Harris, Shaun Robert Sorrell
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Expectations are a keystone concept in macroeconomics, employed across numerous theories and models. The intention of this thesis is to draw upon the richness of economic debate to explore the manner which economic agents form their expectations regarding inflation. Employing direct measures of expe...
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Expectations are a keystone concept in macroeconomics, employed across numerous theories and models. The intention of this thesis is to draw upon the richness of economic debate to explore the manner which economic agents form their expectations regarding inflation. Employing direct measures of expectations reported in prominent surveys published in the United States, this study empirically analyses key differences regarding the utilisation of information across agents. The various chapters within this thesis reconsider the analysis of recent studies and offer new insights regarding information and expectation formation. The general theme examined in this study concerns differences in expectation formation across agents and macroeconomic conditions; however other issues are also analysed. These include: (i) the consistency of survey inflation forecasts with conventional theories of adaptive and rational expectations; (ii) the impact of household demographics on expectations formation, forecast accuracy and group-specific disagreement; (iii) the presence and class of information rigidities embodied amongst the expectations of both professionals and households. The main results of this study can be summarised as follows. Firstly, whilst the forecast accuracy of agents is identified to be time-variant, it is shown that neither professionals, nor households, consistently outperform the other agent class in terms of realised forecast errors. Moreover, the aggregate inflation forecasts reported by both professionals and households are not invariably consistent with the predictions of traditional expectation theory; instead, information rigidities appear embodied within the expectations of both agent classes. Household expectations are further disaggregated by demographic characteristics. Across sample periods, 'more advantaged households' are observed to report smaller forecast errors and lower levels of disagreement; these groups are also found to be more attentive to various forms of news. Similarly, the forecasts reported by men exhibit greater accuracy and are updated more frequently than those of women. Limited differences are however observed across age groups and regions. To summarise, agent expectation formation is time-variant whilst various similarities and differences are observed in the utilisation of information and forecast behaviour between professionals and households.
School of Management