Augmented Information Rigidity Test

Abstract

The information rigidity test examines predictability of forecast errors from forecast revisions. This paper provides an augmented information rigidity test that controls for cross-sectional and time series correlations in panel data. Our Monte Carlo simulations show that the proposed tests have satisfactory size and power properties in typical macro panels. Applications of the tests to the U.S. Survey of Professional Forecasters covering 1968Q4 through 2016Q4 clearly reveal experts' overreaction to news in their macroeconomic expectations.

Keywords: Forecast evaluation, information rigidity, overreaction, panel data, Survey of Professional Forecasters

JEL Classification: C23, C53, E37