DP19991 Long-Run Inflation Expectations
Professional forecasters' long-run inflation expectations overreact to news and exhibit persistent, predictable biases in forecast errors. A model incorporating overconfidence in private information and a persistent expectations bias---which generates persistent forecast errors across most forecasters---accounts for these two features of the data, offering a valuable tool for studying long-run inflation expectations. Our analysis highlights substantial, time-varying heterogeneity in forecasters' responses to public information, with sensitivity declining across all forecasters when monetary policy is constrained by the effective lower bound. The model provides a framework to evaluate whether policymakers' communicated inflation paths are consistent with anchored long-run expectations.
