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Forecast Performance, Disagreement, and Heterogeneous Signal-to-Noise Ratios

Dovern, Jonas ; Hartmann, Matthias

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Abstract

We propose an imperfect information model for the expectations of macroeconomic forecasters that explains differences in average disagreement levels across forecasters by means of cross sectional heterogeneity in the variance of private noise signals. We show that the forecaster-specific signal-to-noise ratios determine both the average individual disagreement level and an individuals' forecast performance: forecasters with very noisy signals deviate strongly from the average forecasts and report forecasts with low accuracy. We take the model to the data by empirically testing for this implied correlation. Evidence based on data from the Surveys of Professional Forecasters for the US and for the Euro Area supports the model for short- and medium-run forecasts but rejects it based on its implications for long-run forecasts.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0611
Place of Publication: Heidelberg
Date Deposited: 14 Mar 2016 14:54
Date: March 2016
Number of Pages: 14
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: disagreement, expectations, imperfect information, signal-to-noise ratio.
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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