The word ‘confabulation’ occurs neither in Benson, nor in Wells, nor in Vikivortaro, nor in ReVo, nor in Sonja. So, what should its rendering be?
The original meaning of confabulate was simply konversi. However, the psychiatric term is derived from the word fabulate (to invent a story) and refers to the unwitting combination of true and false.
Confabulation is a clinically significant, acquired tendency to misremember and falsify, without intent to deceive, as a consequence of brain damage (thus distinguishing it from delusion, which is thought to be the product of a temporary disorder of perception and belief formation).
It is an internationalism, so my suggestion is konfabulacio, a safe and recognizable coinage on the model of konversacio, manifestacio etc. It has already been used, and appears in some online word lists like this one or this one. However, if you prefer Esperanto roots, perhaps something like pseŭdigado (like falsado, but less condemnatory) would be okay.
"Confabulate" is babili.
If you see a difference, perhaps putting into context to show the difference.
"Confabulation" is a very infrequent word in English. Most US English speakers would be hard pressed to give a clear definition. In Esperanto, I'm not sure there's a need for a specialized or technical term, since the phenomenon can be described, rather than named. In context, "nekohera rakontado" or some similar phrase would be clear to specialists. On the rare occasions that specialists would be discussing the phenomenon in Esperanto . . .