SMU SOE Seminar Series (November 13, 2024): Trend, Cycle and Expectation Formation

TOPIC:

ABSTRACT

We document a set of empirical patterns in forecasting behaviors across different horizons that are inconsistent with the common assumption in the expectation formation literature that trends are observable. To address this, we propose a model characterizing how forecasters form expectations when they cannot perfectly distinguish between trends and cycles. Our model not only organizes these empirical patterns well but also accounts for changes in forecasting behavior following the introduction of explicit inflation targeting in 2012. Furthermore, we demonstrate that overlooking this friction can lead policymakers to design sub-optimal policies, underscoring its relevance for policy design.

Keywords: Trend, Cycle, Expectation Formation, Inflation Expectation.

JEL: D83, D84,E37.

Click here to view the CV.
Click here to view the paper.