The Effects of Professional Forecast Dissemination on Macroeconomic Volatility

This paper explores the role that professional forecast announcements can have on macroeconomic volatility. Boundedly rational agents are used inside a medium scale Dynamic Stochastic General Equilibrium (DSGE) model with financial frictions. Modeled agents must form expectations about endogenous variables by selecting between three simple linear forecasting specifications some of which contain the inclusion of a“professionally announced forecast of the economic variable. Historically calibrated simulations of the model show that the usage of the announced professional forecast by the agents in their adaptive learning forecast specifications can reduce the economic volatility in inflation and hours worked by as much as 25% and 12%. However, if the professional forecast is not disseminated well to the agents or biased in its dissemination, agents will learn to ignore the announcement and macroeconomic volatility will increase. Further, the inclusion of very noisy professional forecast signals can result in “coordinated volatility cascades” where agents could reduce macroeconomic volatility by ignoring the professional forecast but choose not to because of its previous forecast performance.