Why are Inflation Forecasts Sticky? Theory and Application to France and Germany

Abstract

This paper proposes a theoretical model of forecasts formation which implies that in presence of information observation and forecasts communication costs, rational professional forecasters might find it optimal not to revise their forecasts continuously, or at any time. The threshold time and state-dependence of the observation reviews and forecasts revisions implied by this model are then tested using inflation forecast updates of professional forecasters from recent Consensus Economics panel data for France and Germany. Our empirical results support the presence of both kinds of dependence, as well as their threshold-type shape. They also imply an upper bound of the optimal time between two information observations of about six months and the coexistence of both types of costs, the observation cost being about 1.5 times larger than the communication cost.

Keywords: Forecast revision, binary choice models, information and communication costs

JEL Classification: C23, D8, E31