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Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts

51 Pages Posted: 7 Nov 2010  

Olivier Coibion

University of Texas at Austin

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

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Date Written: November 2, 2010

Abstract

We propose a new approach to test of the null of full-information rational expectations which is informative about whether rejections of the null reflect departures from rationality or full-information. This approach can also quantify the economic significance of departures from the null by mapping them into the underlying degree of information rigidity faced by economic agents. Applying this approach to both U.S. and cross-country data of professional forecasters and other economic agents yields pervasive evidence of informational rigidities that can be explained by models of imperfect information. Furthermore, the proposed approach sheds new light on the implications of policies such as inflation-targeting and those leading to the Great Moderation on expectations. Finally, we document evidence of state-dependence in the expectations formation process.

Keywords: Expectations, Information Rigidity, Survey Forecasts

JEL Classification: E3, E4, E5

Suggested Citation

Coibion, Olivier and Gorodnichenko, Yuriy, Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts (November 2, 2010). Available at SSRN: https://ssrn.com/abstract=1704145 or http://dx.doi.org/10.2139/ssrn.1704145

Olivier Coibion (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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