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The Nordhaus Test with Many Zeros

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  • Kajal Lahiri
  • Yongchen Zhao

Abstract

We reformulate the Nordhaus test as a friction model where the large number of zero revisions are treated as censored, i.e., unknown values inside a small region of “imperceptibility.” Using Blue Chip individual forecasts of U.S. real GDP growth, inflation, and unemployment over 1985-2020, we find pervasive overreaction to news at most of the monthly forecast horizons from 24 to 1, but the degree of inefficiency is very small. The updaters, i.e., those who make non-zero revisions, are not found to perform better than their “inattentive” peers do.

Suggested Citation

  • Kajal Lahiri & Yongchen Zhao, 2020. "The Nordhaus Test with Many Zeros," CESifo Working Paper Series 8350, CESifo.
    • Handle: RePEc:ces:ceswps:_8350
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    References listed on IDEAS

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    1. Pedro Bordalo & Nicola Gennaioli & Yueran Ma & Andrei Shleifer, 2020. "Overreaction in Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 110(9), pages 2748-2782, September.
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    9. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-674, November.
    10. Zhao, Yongchen, 2019. "Updates to household inflation expectations: Signal or noise?," Economics Letters, Elsevier, vol. 181(C), pages 95-98.
    11. Raffaella Giacomini & Vasiliki Skreta & Javier Turen, 2020. "Heterogeneity, Inattention, and Bayesian Updates," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 282-309, January.
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    Cited by:

    1. An, Zidong & Liu, Dingqian & Wu, Yuzheng, 2021. "Expectation formation following pandemic events," Economics Letters, Elsevier, vol. 200(C).
    2. Conrad, Christian & Lahiri, Kajal, 2023. "Heterogeneous expectations among professional forecasters," ZEW Discussion Papers 23-062, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Nordhaus test; expectations updating; forecast efficiency; fixed-event forecasts; inattentive forecasters;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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