29.06.2021: Sydney Ludvigson – Belief distortions and macroeconomic fluctuations

Presenter: Sydney Ludvigson
Affiliation: Department of Economics, New York University

Paper: Belief Distortions and Macroeconomic Fluctuations

Date: June 29, 2021
Time: 15:00 IDT (GMT+3)

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 on average even for professional forecasters, with all respondent-types over-weighting their own beliefs relative to other information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by large margins, with over-optimism associated with an increase in aggregate economic activity. Biases in expectations evolve dynamically in response to cyclical shocks. Biases about economic growth display greater initial under-reaction while those about inflation display greater delayed over-reaction.

Coauthors: Francesco Bianchi (Duke University), and Sai Ma (Federal Reserve Board of Governors).

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