Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297453 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-5
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies the behaviors of uncertainty through the lens of several popular models of expectation formation. The full-information rational expectations model (FIRE) predicts that both the ex ante uncertainty and the variance of ex post forecast errors are equal to the conditional volatility of shocks to the fundamentals. Incomplete-information models such as Sticky Expectation (SE) and Noisy Information (NI) and non-rational models such as Diagnostic Expectations (DE) predict distinctive rankings of these moments. The paper also shows that uncertainty provides additional parametric restrictions to favor SE over NI as a model of information rigidity, although both predict similar aggregate patterns of forecast errors and disagreement.
Subjects: 
Business fluctuations and cycles
Inflation and prices
Monetary policy and uncertainty
JEL: 
D84
E31
E71
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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