The effect of time-varying fundamentals in learning-to-forecast experiments

• Published in: Journal of economic interaction and coordination Vol. 19; no. 4; pp. 619 - 647
• Main Authors: Alfarano, Simone, Camacho-Cuena, Eva, Colasante, Annarita, Ruiz-Buforn, Alba
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.10.2024; Springer Nature B.V
• Subjects: Business cycles; Central banks; Computer Appl. in Social and Behavioral Sciences; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Experiments; Finance; Forecasts; Inflation; Macroeconomics; Market prices; Mathematical and Computational Physics; Monetary policy; Polls & surveys; Rationality; Regular Article; Theoretical; Long-run expectations; Experimental economics; Coordination; D03; Heterogeneous expectations; Expectations feedback; G12; C91; Convergence
• ISSN: 1860-711X; 1860-7128
• DOI: 10.1007/s11403-023-00397-6

Inspired by macroeconomic scenarios, we aim to experimentally investigate the evolution of short- and long-run expectations under different specifications of the fundamentals. We collect individual predictions for future prices in a series of Learning to Forecast Experiments with a time-varying fundamental value. In particular, we observe how expectations evolve in markets where the fundamental value follows either a V-shaped or an inverse V-shaped pattern. These conditions are compared with markets characterized by a constant and a slightly linear increasing fundamental value. We assess whether minor but systematic variations in the fundamentals affect individual short- and long-run expectations by considering positive and negative feedback-expectation systems. Compared to a setting with constant fundamentals, the slowly varying fundamentals have a limited impact on how subjects form their expectations in positive feedback markets, whereas in negative feedback markets we observe notable changes.