The Importance of Time-Series Extrapolation for Macroeconomic Expectations

Abstract

Abstract This article presents a simple experiment on how laypeople form macroeconomic expectations. Subjects have to forecast inflation and gross domestic product growth. By varying the information provided in different treatments, we can assess the importance of historical time-series information vs. information acquired outside the experimental setting such as knowledge of expert forecasts. It turns out that the availability of historical data has a dominant impact on expectations and wipes out the influence of outside-lab information completely. Consequently, backward-looking behavior can be identified unambiguously as a decisive factor in expectation formation.