Belief Distortions and Macroeconomic Fluctuations

CEPR Discussion Paper No. DP15003

93 Pages Posted: 28 Jul 2020 Last revised: 22 Sep 2021

See all articles by Francesco Bianchi

Francesco Bianchi

Duke University; NBER; CEPR

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

Sai Ma

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

This paper combines a data rich environment with a machine learning algorithm to provide new estimates of time-varying systematic expectational errors ("belief distortions") embedded in survey responses. We find that distortions are large even for professional forecasters, with all respondent-types over-weighting their own beliefs relative to publicly available information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by large margins, with biases in expectations evolving dynamically in response to cyclical shocks. The results suggest that artificial intelligence algorithms can be productively deployed to correct errors in human judgement and improve predictive accuracy.

Keywords: beliefs, Biases, Expectations, Machine Learning

JEL Classification: E17, E27, E32, E7, G4

Suggested Citation

Bianchi, Francesco and Ludvigson, Sydney C. and Ma, Sai, Belief Distortions and Macroeconomic Fluctuations (July 2020). CEPR Discussion Paper No. DP15003, Available at SSRN: https://ssrn.com/abstract=3650118

Francesco Bianchi (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CEPR ( email )

London
United Kingdom

Sydney C. Ludvigson

New York University - Department of Economics ( email )

19 West 4th Street, 6th floor
New York, NY 10012
United States
212-998-8927 (Phone)
212-995-4186 (Fax)

HOME PAGE: http://www.econ.nyu.edu/user/ludvigsons/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sai Ma

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
112
PlumX Metrics