Why are Inflation Forecasts Sticky? Theory and Application to France and Germany

28 Pages Posted: 6 Dec 2017

See all articles by Frederique Bec

Frederique Bec

Banque de France

Raouf Boucekkine

Universite Catholique de Louvain

Caroline Jardet

Banque de France

Date Written: December 2017

Abstract

This paper proposes a theoretical model of forecasts formation which implies that in presence of information observation and forecasts communication costs, rational professional forecasters might find it optimal not to revise their forecasts continuously, or at any time. The threshold time and state-dependence of the observation reviews and forecasts revisions implied by this model are then tested using inflation forecast updates of professional forecasters from recent Consensus Economics panel data for France and Germany. Our empirical results support the presence of both kinds of dependence, as well as their threshold-type shape. They also imply an upper bound of the optimal time between two information observations of about six months and the coexistence of both types of costs, the observation cost being about 1.5 times larger than the communication cost.

Keywords: Forecast revision, binary choice models, information and communication costs

JEL Classification: C23, D8, E31

Suggested Citation

Bec, Frederique and Boucekkine, Raouf and Jardet, Caroline, Why are Inflation Forecasts Sticky? Theory and Application to France and Germany (December 2017). Banque de France Working Paper No. 650, Available at SSRN: https://ssrn.com/abstract=3082834 or http://dx.doi.org/10.2139/ssrn.3082834

Frederique Bec (Contact Author)

Banque de France ( email )

Paris
France

Raouf Boucekkine

Universite Catholique de Louvain ( email )

3, Place Montesquieu
Institut de Recherches Economiques et Sociales (IRES)
1348 Louvain-la-Neuve
Belgium
+32 10 47 38 48 (Phone)
+32 10 47 39 45 (Fax)

Caroline Jardet

Banque de France ( email )

31 rue croix des petits champs
75049 Paris Cedex 01
France

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