Do Professionals' Inflation Forecasts Incorporate the Beliefs of Others? A Functional Data Approach

Abstract

We apply functional data analysis to survey expectations data, and show that functional principal component analysis combined with functional regression analysis is a fruitful way of capturing the effects of others' forecasts on a respondent's inflation forecasts. We estimate forward-looking Phillips curves on each respondent's inflation and unemployment rate forecasts, and show that for nearly a half of the respondents the forecasts of others are important. The functional principal components of the cross-sectional distributions of forecasts are shown to capture characteristics other than the mean or consensus forecast, and include forecaster disagreement.

Keywords: Inflation forecasting, Functional data analysis, Survey of Professional Forecasters, Forecast disagreement JEL Classification: C53

JEL Classification: C53, E37