Skip to main content
SpringerLink
Log in

On rationality of business expectations: A micro analysis of qualitative responses

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

Rationality of expectations of individual agents have been shown to play a crucial role for macroeconomic model building and economic policy. Many applied studies therefore tried to test the implications of rationality by use of survey data. This paper differs from previous studies in that the data used are qualitative monthly survey responses by a large number of individual manufacturing firms to questions concerning their own expected and current business conditions. Results tend to reject the validity of the hypothesis of unbiasedness and efficiency. Due to the qualitative nature of the data, use is made of the log-linear probability model.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aiginger K (1982) Empirical evidence on the rational expectations using reported expectations. Empirica 1:25–72

    Google Scholar 

  • Amihud Y, Mendelson H (1982) The output-inflation relationship. An inventory-adjustment approach. Journal of Monetary Economics 9:163–184

    Google Scholar 

  • Barro RJ (1976) Rational expectations and the role of monetary policy. Journal of Monetary Economics 2:1–33

    Google Scholar 

  • Biship YMM, Fienberg SE, Holland PW (1978) Discrete multivariate analysis: theory and practice. MIT Press, Cambridge, Mass

    Google Scholar 

  • Blinder AS, Fischer S (1981) Inventories, rational expectations, and the business cycle. Journal of Monetary Economics 8:277–304

    Google Scholar 

  • Bouissou MB, Laffont JJ, Vuong QH (1983) Disequilibrium econometrics on micro data. Mimeo, Toulouse and California Institute of Technology

  • Carlson JA (1977) A study of price forecasts. Annals of Economics and Social Measurement 6:27–56

    Google Scholar 

  • Feige EL, Pearce DK (1976) Economically rational expectations: are innovations in the rate of inflation independent of innovations in measures of monetary and fiscal policy? Journal of Political Economy 84:499–522

    Google Scholar 

  • Fienberg SE, Meyer MM (1983) Loglinear models and categorical data analysis with psychometric and econometric applications. Journal of Econometrics 22:191–214

    Google Scholar 

  • Figlewski S (1983) Optimal price forecasting using survey data. Review of Economics and Statistics 65:13–21

    Google Scholar 

  • Figlewski S, Wachtel P (1981) The formation of inflationary expectations. Review of Economics and Statistics 63:1–10

    Google Scholar 

  • Fischer S (1977) Long-term contracts, rational expectations, and the optimal money supply rule. Journal of Political Economy 85:191–205

    Google Scholar 

  • Flaig G (1983) Die Analyse von qualitativen Variablen mit Latenten-Struktur-Modellen. PhD Thesis, Universität Mannheim

  • Flaig G, Zimmermann KF (1983) Misspecification and seasonal adjustment of qualitative panel data. CIRET-Studien 33:63–95

    Google Scholar 

  • Friedman BM (1980) Survey evidence on the “rationality” of interest rate expectations. Journal of Monetary Economics 6:453–465

    Google Scholar 

  • Goodman LA, Kruskal WH (1979) Measures of association for cross classifications. New York

  • Hausman JA, Wise DA (1978) A conditional probit model for qualitative choice: discrete decisions recognizing interdependence and heterogenous preferences. Econometrica 46:403–426

    Google Scholar 

  • Heckman JJ (1978) Dummy endogenous variables in a simultaneous equation system. Econometrica 46:931–959

    Google Scholar 

  • Kawasaki S, Zimmermann KF (1981) Measuring relationships in the log-linear probability model by some compact measures of association. Statistische Hefte 22:94–121

    Google Scholar 

  • Kawasaki S, Zimmermann KF (1983) Testing the rationality of price expectations for manufacturing firms. Mimeo, Berlin Mannheim

    Google Scholar 

  • Kawasaki S, McMillan J, Zimmermann KF (1983) Inventories and price inflexibility. Econometrica 51:599–610

    Google Scholar 

  • Koenig H, Nerlove M, Oudiz G (1981) On the formation of price expectations: an analysis of business test data by log-linear probability models. European Economic Review 16:103–138

    Google Scholar 

  • Koenig H, Nerlove M (1983) Response of prices and production to unanticipated demand shocks: some microeconomic evidence. Mimeo, Mannheim Pennsylvania

    Google Scholar 

  • De Leeuw F, McKelvey MJ (1981) Price expectations of business firms. Brookings Papers on Economic Activity, June Issue, pp 299–314

  • Lucas RE (1972) Expectations and the neutrality of money. Journal of Economic Theory 4:103–124

    Google Scholar 

  • Lucas RE (1976) Econometric policy evaluation: a critique. In: Brunner K, Meltzer A (eds) The Phillips curve and labor markets. North-Holland, Amsterdam

    Google Scholar 

  • Mullineaux DJ (1978) On testing for rationality: another look at the Livingston price expectations data. Journal of Political Economy 86:329–336

    Google Scholar 

  • Mullineaux DJ (1980) Inflation expectations and money growth in the United States. American Economic Review 88:149–161

    Google Scholar 

  • Muth JF (1961) Rational expectations and the theory of price movements. Econometrica 29:315–335

    Google Scholar 

  • Nerlove M, Press SJ (1973) Univariate and multivariate log-linear and logistic models. Rand Corporation, Report R-1306-EDH/NIH

  • Nerlove M (1983) Expectations, plans, and realizations in theory and practice. Econometrica 51:1251–1279

    Google Scholar 

  • Noble NR, Fields TW (1982) Testing the rationality of inflation expectations derived from survey data: a structure-based approach. Southern Economic Journal 49:361–373

    Google Scholar 

  • Pesando JE (1975) A note on the rationality of the Livingston price expectations. Journal of Political Economy 83:849–858

    Google Scholar 

  • Ronning G (1983) The no-change interval in business tendency surveys. Mimeo, Konstanz

    Google Scholar 

  • Sargent TJ, Wallace N (1975) “Rational” expectations, the optimal monetary instrument and the optimal money supply rule. Journal of Political Economy 83:241–255

    Google Scholar 

  • Severn AK (1983) Formation of inflation expectations in the UK pitfalls in the use of the error-learning model. European Economic Review 20:349–363

    Google Scholar 

  • Theil H (1966) Applied economic forecasting. North-Holland, Amsterdam

    Google Scholar 

  • Turnovsky SJ (1970) Some empirical evidence on the formation of price expectations. Journal of the American Statistical Association 65:1441–1454

    Google Scholar 

  • Turnovsky SJ, Wachter ML (1972) A test of the “expectations hypothesis” using directly observed wage and price expectations. Review of Economics and Statistics 54:47–54

    Google Scholar 

  • Vogler KA (1977) The business situation: on the meaning of an undetermined survey variable. In: Strigel WH (ed) In search of economic indicators. Springer, New York

    Google Scholar 

  • Zarnowitz W (1982) The accuracy of individual and group forecasts from business outlook surveys. National Bureau of Economic Research, Working Paper No 1053

Download references

Author information

Authors and Affiliations

  1. Institut für Volkswirtschaftslehre und Statistik, Universität Mannheim, Seminargebäude A5, 6800, Mannheim 1, FRG

    Klaus F. Zimmermann

Authors
  1. Klaus F. Zimmermann
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

I wish to thank Werner Gaab, Heinz König, Marc Nerlove, Helmut Seitz, Mike Veall and an anonymous referee of this journal for helpful comments on an earlier draft and the Sonderforschungsbereich 5, University of Mannheim, for valuable assistance. I have also benefited much from previous work with Seiichi Kawasaki. This paper was presented at conferences of the Econometric Society and the German Statistical Association and at seminars of INSEE, Paris, and the CORE, Louvain la Neuve.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Zimmermann, K.F. On rationality of business expectations: A micro analysis of qualitative responses. Empirical Economics 11, 23–40 (1986). https://doi.org/10.1007/BF01978143

Download citation

  • Received:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01978143

Keywords

Search

Navigation