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Models, Inattention and Expectation Updates

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  • Skreta, Vasiliki
  • Giacomini, Raffaella
  • Turén, Javier

Abstract

We formulate a theory of expectation updating that fits the dynamics of accuracy and disagreement in a new survey dataset where agents can update at any time while observing each other's expectations. Agents use heterogeneous models and can be inattentive but, when updating, they follow Bayes' rule and assign homogeneous weights to public information. Our empirical findings suggest that agents do not herd and, despite disagreement, they place high faith in their models, whereas during a crisis they lose this faith and undergo a paradigm shift. This simple, "micro-founded" theory could enhance the explanatory power of macroeconomic and finance models.

Suggested Citation

  • Skreta, Vasiliki & Giacomini, Raffaella & Turén, Javier, 2015. "Models, Inattention and Expectation Updates," CEPR Discussion Papers 11004, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11004
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    Cited by:

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    3. Michael Clements, 2016. "Are Macro-Forecasters Essentially The Same? An Analysis of Disagreement, Accuracy and Efficiency," ICMA Centre Discussion Papers in Finance icma-dp2016-08, Henley Business School, University of Reading.

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    More about this item

    Keywords

    Bayesian learning; Disagreement; Expectation formation; Forecast accuracy; Herding; Heterogeneous agents; Information rigidities;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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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