Trend, cycle and expectation formation by Heng Chen

Join us for this weeks Macroeconomics Research Seminar, Spring Term 2024.

Heng Chen, from the University of Hong Kong, will present this weeks Macroeconomics seminar on Trend, cycle and expectation formation.

Abstract

Using the survey of professional forecasters, we document two facts that contradict the standard assumption of stationary state variables in the expectation formation literature: (i) changes in trend beliefs are negatively correlated with changes in cyclical beliefs; (ii) forecast dispersion increases with the forecast horizon. To account for the facts, we propose an otherwise standard forecasting model with stochastic trends, in which forecasters cannot observe and separate trends and cycles perfectly but only have noisy information about them. This information friction leads to persistent forecasting errors or confusion regarding both components. Furthermore, we show that this information friction may underlie changes in forecasting behaviors following the implementation of explicit inflation targeting in 2012. Additionally, we study how behavioral biases can amplify the impact of this information friction.

This seminar will be held on campus in the Economics Common Room at 3.30pm on Friday 8th March 2024. This event is open to all levels of study and is also open to the public. To register your place, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.