Rigidity of Expectations : Additional Evidence from Density Forecasts of the Inflation by Professionals and Households

Surveys on density forecasts of macroeconomic variables that do not available until recently provide one additional moment restriction, uncertainty, for testing and exploring the implications of various theories on expectation formation. This paper first documents the persistent dispersion in uncertainty about future inflation as well as other stylized facts across economists and households. Second, utilizing the panel data of individual uncertainty, I provide additional test results and estimates that are not consistent with the benchmark prediction of full-information rational expectation (FIRE). Finally, using externally identified shocks to inflation, I show the dynamic responses of forecasting moments to shocks are broadly consistent with theories of expectation rigidity and additional evidence for shock-dependent nature of the rigidity. This sets the stage for estimating shock-specific rigidity using uncertainty as a next step of the analysis