Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory

European Banking Center Discussion Paper No. 2012-018

CentER Discussion Paper Series No. 2012-072

66 Pages Posted: 10 May 2011 Last revised: 4 Sep 2012

See all articles by Damjan Pfajfar

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Blaz Zakelj

Universitat Pompeu Fabra

Date Written: September 4, 2012

Abstract

This paper compares the behavior of subject' 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.

Keywords: Laboratory Experiments, Confidence Bounds, New Keynesian Model

JEL Classification: C91, C92, E37, D80

Suggested Citation

Pfajfar, Damjan and Zakelj, Blaz, Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (September 4, 2012). European Banking Center Discussion Paper No. 2012-018; CentER Discussion Paper Series No. 2012-072. Available at SSRN: https://ssrn.com/abstract=1836455 or http://dx.doi.org/10.2139/ssrn.1836455

Damjan Pfajfar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Blaz Zakelj

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain
+34 93 542 1998 (Phone)
+34 93 542 2533 (Fax)

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