Abstract
Modern economic theory gives an important role to expectations as an influence on outcomes. This paper reviews evidence on how well measures of expectations conform to outcomes. It confirms earlier results that measures taken from financial markets perform poorly as predictors of outcomes. Looking at the individual responses to the Confederation of British Industry’s Industrial Trends Survey, it does find, however, that there are significant correlations between expected and realised outcomes of wages, prices, costs orders and employment. It also finds some evidence that actual prices reflect expected future prices, but with a coefficient much lower than economic theory predicts. There is evidence that forecast errors are explained by past forecasts, as well as revisions to the economic outlook, casting doubt on the idea that firms’ forecasts make the best use of the information available at the time. The paper concludes by observing that, while expectations are undoubtedly important, economists need to build on work looking at how they are derived instead of simply assuming they are rational.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.