Practice Makes Perfect: Learning Effects with Household Point and Density Forecasts of Inflation

Abstract

This paper shows how both the characteristics and the accuracy of the point and density forecasts from a well-known panel data survey of households' inflationary expectations – the New York Fed's Survey of Consumer Expectations – depend on the tenure of survey respondents. Households' point and density forecasts of inflation become significantly more accurate with repeated practice of completing the survey. These learning gains are best identified when tenure-based combination forecasts are constructed. Tenured households on average produce lower point forecasts of inflation, perceive less forecast uncertainty, round their uncertainty but not their point forecasts, report unimodal densities, and provide internally consistent point and density forecasts.