Macroeconomic Expectations and Cognitive Noise

2024-19 | June 21, 2024

This paper examines forecast biases through cognitive noise, moving beyond the conventional view that frictions emerge solely from using external data. By extending Sims’s (2003) imperfect attention model to include imperfect memory, I propose a framework where cognitive constraints impact both external and internal information use. This innovation reveals horizon-dependent forecast sensitivity: short-term forecasts adjust sluggishly while long-term forecasts may overreact. I explore the macroeconomic impact of this behavior, showing how long-term expectations, heavily influenced by current economic conditions, heighten inflation volatility. Moreover, structural estimation indicates that neglecting imperfect memory critically underestimates the informational challenges forecasters encounter.

Suggested citation:

Sung, Yeji. 2024. “Macroeconomic Expectations and Cognitive Noise.” Federal Reserve Bank of San Francisco Working Paper 2024-19.

About the Author
Yeji Sung is an economist in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Yeji Sung