Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts

Coibion, Olivier; Gorodnichenko, Yuriy

doi:10.5089/9781475519242.001

Cited by 235 publications

(454 citation statements)

References 61 publications

(71 reference statements)

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“…Second, our paper is related to recent work on limited attention (e.g., Sims (), Gabaix ()). In general, these models predict sluggish expectations and underreaction to information, consistent with empirical evidence for inflation (Coibion and Gorodnichenko (, )). Also related is research on momentum and slow reaction to information in financial markets (Jegadeesh and Titman (), Hong and Stein (), Bouchaud et al.…”

supporting

confidence: 84%

Diagnostic Expectations and Credit Cycles

Bordalo¹,

Gennaioli²,

Shleifer

2018

The Journal of Finance

485

238

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We present a model of credit cycles arising from diagnostic expectations-a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.

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supporting

confidence: 84%

Diagnostic Expectations and Credit Cycles

Bordalo¹,

Gennaioli²,

Shleifer

2018

The Journal of Finance

485

238

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“…That disconnection could take the relatively modest form of a systematic bias, or it could take the form of a more dramatic departure from rational expectations, with the survey expectation showing little connection to the longer‐run trend in inflation. Studies such as Coibion and Gorodnichenko () have presented evidence that survey forecasts depart from rationality in that they are subject to sluggish adjustment consistent with information rigidities. Mertens and Nason () develop a joint model of inflation and inflation forecasts that permits time variation in the strength of the information rigidities.…”

Section: Discussionmentioning

confidence: 99%

“…Surveys might also contain some noise, due to factors such as changes in participants from one survey date to another. In addition, papers such as Coibion and Gorodnichenko () and Mertens and Nason () find evidence of informational rigidities such that professional forecasters are slow to adjust their expectations. Accordingly, we desire an econometric specification that allows us to estimate the relationship between trend inflation and the long‐run expectation of forecasters rather than imposing a particular form.…”

Section: Econometric Modeling Of Trend Inflationmentioning

confidence: 99%

“…Although our main empirical work does not directly address the question of why long‐run surveys may differ from trend inflation, the final section of this paper includes some discussion of this issue in light of recent work on various topics, including work on informational rigidities in the professionals' forecasts by Coibion and Gorodnichenko () and Mertens and Nason ().…”

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confidence: 99%

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A New Model of Inflation, Trend Inflation, and Long‐Run Inflation Expectations

Chan¹,

Clark²,

Koop³

2018

J of Money Credit Banking

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This paper develops a bivariate model of inflation and a survey‐based long‐run forecast of inflation that allows for the estimation of the link between trend inflation and the long‐run forecast. Thus, our model allows for the possibilities that long‐run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. Using a variety of inflation measures and survey‐based forecasts for several countries, we find that long‐run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation. It is less helpful to simply equate trend inflation with the long‐run forecasts.

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“…Hiring and firing decisions are thus based on perceptions of the persistent component of productivity. Standard signal extraction arguments will imply that such perceptions are a slow‐moving state variable (see, e.g., Coibion and Gorodnichenko ()). Accordingly, hiring and firing decisions respond less aggressively to aggregate shocks on impact.…”

Section: Summary and Discussionmentioning

confidence: 99%

The aggregate effects of labor market frictions

Elsby

Michaels

Ratner

2019

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Labor market frictions are able to induce sluggish aggregate employment dynamics. However, these frictions have strong implications for the source of this propagation: they distort the path of aggregate employment by impeding the flow of labor across firms. For a canonical class of frictions, we show how observable measures of such flows can be used to assess the effect of frictions on aggregate employment dynamics. Application of this approach to establishment microdata for the United States reveals that the empirical flow of labor across firms deviates markedly from the predictions of canonical labor market frictions. Despite their ability to induce persistence in aggregate employment, firm-size flows in these models are predicted to respond aggressively to aggregate shocks, but react sluggishly in the data. The paper therefore concludes that the propagation mechanism embodied in standard models of labor market frictions fails to account for the sources of observed employment dynamics.

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Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts

Abstract: We propose a new approach to test the full-information

Cited by 235 publications

References 61 publications

Diagnostic Expectations and Credit Cycles

Diagnostic Expectations and Credit Cycles

A New Model of Inflation, Trend Inflation, and Long‐Run Inflation Expectations

The aggregate effects of labor market frictions

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