Inattention, Disagreement and Internal (In)Consistency of Inflation Forecasts

Produced by: 
Banco Central del Uruguay
Available from: 
July 2018
Paper author(s): 
Fernando Borraz
Laura Zacheo
Financial Economics

This paper uses a rich and unique data set with eight years of monthly inflation expectation and subjective probability distributions to analyze the expectation formation process of firms in Uruguay. First, firms exhibit a very high degree of attention to current inflation conditions which we link to the countries' historical inflation experience. Second, the forecasters fail to incorporate all of the available information and firms' forecasts are more accurate than those of professional forecasters in Uruguay. Third, there is disagreement between forecasters at the short run but also at the long run and the disagreement is higher for forecasters that revise than for forecasters that do not revise. Therefore, there must be some noise or friction that prevents agents that changes prices to get access to perfect information. Fourth, the disagreement is not fully explained by differences in the information set because one in five forecasts is not internal consistent.


Research section: 
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