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

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.