Behavioral Impulse Responses

Abstract

We develop the concept of a Behavioral Impulse Response (BIR), which uses the dynamics of forecast errors to trace out how deviations from full-information rational expectations (FIRE) are corrected over time. BIRs based on professional forecasts of macroeconomics outcomes and corporate earnings imply that violations of FIRE occur much more frequently than suggested by existing tests. These deviations tend to correct gradually, often over several quarters, with sizable variation in correction speeds across different forecast targets and forecasters. Our theoretical analysis highlights why BIRs provide a simple yet powerful set of moments that can be used to discipline models of belief formation.

JEL Classification: C52, C53, D83, D84, E7, E17, G17, G14