What Determines Forecasters’ Forecasting Errors?

Abstract

This paper contributes to the growing literature in macroeconomics and finance on expectation formation and information processing by analyzing the relationship between expectation formation at the individual level and the prediction of macroeconomic aggregates. Using information from business tendency surveys we present a new approach of analyzing qualitative forecasting errors made by forecasters. Based on a quantal response approach with misclassification we define qualitative mispredictions of forecasters in terms of deviations from the qualitative rational expectation forecast and relate them to individual and macro factors driving these mispredictions. Our approach permits a detailed analysis of individual forecasting decisions allowing for the introduction of individual and economy wide determinants that affect the individual forecasting error process.

Keywords: Expectations, Tendency Survey, Forecasting Errors, Misclassification, GLARMA

JEL Classification: C23, C25, D84, E27