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Cognitive dissonance and forecaster overconfidence in a model of inflation expectations with distributional inaccuracies

Crawford School of Public Policy | Centre for Applied Macroeconomic Analysis

Event details

Seminar

Date & time

Thursday 28 July 2016
11.00am–12.00pm

Venue

Seminar Room 2, Level 1, JG Crawford Building 132, Lennox Crossing, ANU

Speaker

Professor Shaun Vahey, University of Warwick.

Contacts

Rossana Bastos

In this seminar Shaun Vahey will provide an overview of his recent paper, Cognitive Dissonance and Forecaster Overconfidence in a Model of Inflation Expectations with Distributional Inaccuracies.

Professional forecasters and central bankers often describe and quantify the asymmetric risks associated with macroeconomic variables. In contrast, nearly all extant models of inflation expectations assume that agents know exactly the distribution of elliptical disturbances. In this presentation Shaun Vahey will explore an alternative mechanism in which agents form expectations of inflation in the presence of distributional inaccuracies. Agents learn the true distribution and inflation dynamics by fitting (recursively) a Gaussian copula model to the univariate time series. Deploying empirical cumulative distribution function (ECDF) margins, the copula learning agents (in small samples) exhibit a form of cognitive dissonance. As a result, agents misperceive extreme-event risk and have misplaced confidence in their predictions. Nevertheless, with exposure to extreme inflation events, agents better fit the tails of the unknown error distribution, consistent with the notion of adaptive learning. The implications of copula learning for expectations are explored by Shaun in an application using quarterly US inflation (GDP deflator) data.

Shaun is Professor at the University of Warwick. He previously taught at the University of Cambridge, Melbourne Business School and the Australian National University. Shaun’s research has been published in academic journals including the American Economic Review, the Journal of Business and Economic Statistics, the Journal of Applied Econometrics and the Economic Journal. An Associate Editor of the Journal of Business and Economic Statistics, Shaun previously served as a Bank Official at the Bank of England, a Senior Adviser at the Reserve Bank of New Zealand, and as a Special Adviser at Norges Bank. He earned his PhD from the University of British Columbia in 1995.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.

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