Rational Expectations Hypothesis Research Articles

Examining Inflation Expectations within Asian Economies: Application of Wavelet Quantile Analysis towards Assessing Monetary Policy Credibility

The relevance of rational expectations has generated a renewed interest in assessing the accuracy of monetary policy declarations. Despite the enduring principles of the rational expectations theory, a remarkably dependable central bank can alleviate inflation by skillfully managing inflation expectations, thus avoiding adverse effects on employment. This paper explores the complex relationship between inflation expectations, target inflation rates, and the credibility of monetary policy, emphasizing the importance of rule compliance and transparent communication for establishing public confidence in central banks. While the estimation processes the study utilizes wavelet-based quantile regression by investigating data from 1990q1 to 2021q4, with variations across selected countries. The credibility index (CI) is employed to instrument the dependability of monetary policies. Nevertheless, the results of this study indicate that Policy credibility has a significant impact on inflation expectations in Bangladesh and Sri Lanka, underscoring the importance of clear communication and institutional reforms. Different outcomes in India and considerable effects in Pakistan underscore the necessity of customized policy measures and communication strategies to address inflation and promote economic stability in South Asia.

From coordination devices to coordination failures: on the changing epistemology of sunspots since the 1970s

The widespread adoption of the rational expectations hypothesis in macroeconomic literature from the 1970s onwards has often overlooked the issue of coordinating individual decisions, particularly regarding expectations. How is common knowledge, essential for rational expectations equilibrium, established? When common knowledge supports multiple equilibria, how do expectations converge to a specific one? These pivotal questions have always been at the core of sunspot literature, which emerged at the turn of the 1980s, albeit sometimes implicitly. While unspots were initially regarded by pioneers David Cass and Karl Shell as essential coordination devices, their epistemological status evolved with the introduction of competing models in ndogenous fluctuations (chaos, bifurcations, deterministic cycles) and the transition from the overlapping generations to the infinitely lived agent framework. Ultimately identified as anticipation shocks, sunspots were portrayed as instability triggers and markers of coordination failures. However, recent advancements in sunspot theory, especially in the areas of financial crises and experimental economics, have started to rehabilitate the original interpretation of sunspots as coordination mechanisms. This article maps out the historical development, shedding light on the evolving concepts surrounding sunspots.

The mediating effect of the COVID-19 pandemic on heuristic techniques and cognitive biases on investment decision-making

US investors’ behavioral finance and investment decision-making approach became a concern during the COVID-19 pandemic era as the capital market crashed. The study used mediation analysis to explain how or why the COVID-19 pandemic intervened in the causal association of behavioral finance concepts of heuristic techniques and cognitive biases on their investment decision-making. This causal research design study was based on 500 snowball-sampled US investors who answered self-constructed, validated, and reliability-tested Likert-scale quantitative variables measured through a first-party data collection approach. The results showed that the COVID-19 pandemic was a specific moderate to partial significant mediator on the low positive significant relationships between heuristic techniques and investment decision-making, and the COVID-19 pandemic was a specific moderate to full significant mediator on the low positive not significant relationships between cognitive biases and investment decision-making among US investors. From the point of view of behavioral finance, the COVID-19 pandemic situation clearly and significantly demonstrated how US investors used 75.6% heuristics techniques (calculated guesses based on prior knowledge) and 87.5% cognitive biases (unintentional errors in their worldview) to cause the crash of the capital market. These findings confirm the rational expectations theory.

Accrual and real earnings management by rumored takeover targets

In this study we find evidence of income-increasing accrual and real earnings management occurring up to two quarters prior to the initial publication of a takeover rumor. We also find that post-rumor earnings management depends on both its form (accrual or real) as well as whether the rumor eventuates, observing income-decreasing accrual earnings management when the rumor is not accurate. Moreover, cumulative measures of earnings management for the month prior to the rumor are significant predictors of rumor accuracy, while being negatively correlated to rumor date and long-run returns. We interpret results as being consistent with rational expectations theory and note how managerial motivations may adapt to the degree of takeover likelihood.

Peculiarity of Behavior of Economic Agents under Cognitive Constraints in a Semi-Open New Keynesian Model

The aim of the paper is to analyze changes and peculiarities of behavior of economic agents with bounded rationality in the New Keynesian model, in which imported equipment and technology are one of the factors of production, and households consume only domestic products. The formation of output gap and inflation expectations by agents is based on stationary values of these variables and on extrapolation of the latest available data on inflation and the output gap. The weight shares of agents applying these rules change endogenously. Histograms of the frequency distribution of the degree of buoyancy and the impulse responses of monetary policy shocks and technology shocks to the variables under study show that a less open economy tends to go through an economic cycle with a smaller amplitude than a more rigid economy. Analyses of the trade-offs between the volatility of inflation and the output gap at different parameter values in the Taylor rule show their non-linear nature (in contrast to standard models with rational expectations). An important result obtained in this analysis is that the rational expectations hypothesis is more consistent with a closed economy than with an open one.

Rational expectations: an approach of anticipated linear-quadratic social optima

Motivated by rational expectations theory, this paper studies a class of stochastic linear-quadratic dynamic optimisation problems involving a large number of weakly-coupled heterogeneous agents. Different from well-studied mean field games, these agents formalise a team with cooperation to minimise some social cost functional. Moreover, the state here evolves by some anticipated backward stochastic differential equation in which the terminal instead initial condition is specified and the anticipated terms are involved. Applying a so-called anticipated person-by-person optimality principle, we construct an auxiliary control problem for each agent based on decentralised information. The decentralised social strategy is derived by a class of new consistency condition systems, which are mean-field-type anticipated forward–backward stochastic differential delay equations (AFBSDDEs). The well-posedness of such consistency condition system is obtained via discounting method. The corresponding asymptotic social optimality is also verified as the population size goes to infinity.

An assessment on rational expectations and perception engineering in the cyber-capitalist age

In recent years, studies in economics have revealed that analyses in psychology, sociology, religion, and ethics have begun to describe trends in the markets, household preferences, entrepreneurships, and investor decisions. These studies are referred to be results of the critical dynamics put forward by the "Rational Expectations Theory." Although conditional rationality is widely assumed in economic analysis, the assumptions of rational expectations as a unique approach allow for new perspectives of bias on the perception engineering which is being realised through social media for both political or economic operations. Percepion engineering has become easy and widespread in this new age of cyber-capitalism in which artificilal intelligence (AI) based Management Information Systems (MIS) and IoT tend to dominate pervasively for economic, political or religious reasons. This study asserts that investment decisions, political tendencies and economic preferences may not be rational due to exposure to perception engineering through innovative technology of algorithms and social media. Therefore, in today's cyber-capitalist ecosystems, the generation of manipulated social consent has been incredibly enhanced by hacking, collecting, accumulating, changing, controlling, and disseminating information for propaganda and marketing purposes over social media. In this multidiscipinary study, perception engineering that has become a part of artificial intelligence-assisted social engineering processes, is concluded to be the key spoiler of rational expectations of economic agents. In this context, possible measures are developed and suggested.

A study of Fisher Effect in India.

In this paper, the relationship between nominal interest rate and inflation is analyzed based on Fisher Effect (FE) theory. As per FE theory, the difference between nominal interest rate and expected inflation is equal to real interest rate. The theory proposes that a rise in expected inflation can lead to positive impact on nominal interest rate when the real interest rate is constant. For analyzing FE, the inflation rate measures based on Core index, Wholesale Price Index (WPI) and Consumer Price Index (CPI) are considered. As per rational expectation hypothesis, the one-period-ahead inflation rate is considered as expected inflation (eInf). The interest rates (IR) associated with call money, treasury bills of 91- and 364-day maturities are considered. The study uses ARDL bounds testing approach and Granger causality test for analyzing the long-run relationship between eInf and IR. The study finds evidence for presence of cointegrating relationship between eInf and IR in India. Contrary to FE theory, the long-run relation between eInf and IR is found to be negative. The extent and significance of long-run relationship varies depending on measures of eInf and IR considered. Along with cointegration, the expected WPI inflation and interest rate measures also exhibit Granger causality in at least one direction. Although, the cointegration is not observed between expected CPI and IR, there exists Granger causality between these variables. This increasing disconnect between eInf and IR could be attributed to adoption of flexible inflation targeting framework, pursual of additional objectives by monetary authority, different sources and types of inflation, etc.

The Timing of Technology Adoption in Network Industries

This paper analyzes the effect of network externalities on firms’ timing of new technology adoption in a network industry. In a pre-commitment game under Cournot competition, network effects tend to accelerate the timing of the leader and the follower regarding their adoption dates: under the rational expectations hypothesis and also under the firms’ output commitment. However, while an increase in network effects tends to reduce the discrepancy between the optimal social timing of the new technology adoption and the market-driven time of adoption in the rational expectations model, the opposite occurs under the output commitment game.

Consequences to the Stock Market Caused by Currency Fluctuations: Jordanian Evidence

Purpose: The aim of this study is to examine the fluctuations in currency exchange in the stock market, as it relates to the Jordanian market. Theoretical framework: The study's main goal is to identify how Jordanian SMR changes in currency exchange are influenced. Thus, the rational expectations theory has been used in this study. This theory illustrates three key aspects that influence the decision to participate in the stock market, including the availability of information, prior experience, and human reason. Design/ methodology/approach: The study incorporates the quantitative design, in which, information was extracted from secondary sources i.e. Investing.com. The information has been compiled considering the exchange rates, stock market returns, and cotton prices, beginning in 2015 and ending in 2020. The analysis has been conducted with Granger Causality test, VAR, and ADF. Findings: The results of this study concludes that fluctuations of exchange rates do not impact changes in cotton prices and the returns of the Jordanian stock exchange. Research, Practical & Social implications: The study is limited to Jordan, as only Jordan’s cotton price and stock market return data have been gathered. In addition, the time period of consideration of data is confined from 2015 to 2019, limiting the study’s scope. Originality/Value: The study uses sensitivity analysis to investigate the robustness of the impacts of fluctuations in currency exchange in the stock market, as it relates to the Jordanian market.

Identifying the source of information rigidities in the expectations formation process

Coibion and Gorodnichenko (2015) provide a useful framework to test the null hypothesis of full-information rational expectations against two popular classes of information rigidities, sticky information (SI) and noisy information (NI). However, the observational equivalence of SI and NI in average forecast errors gives no power in the test for one against the other. We identify the source of information rigidities by estimating the equations for the average forecast errors and variance of forecasts. The results show the importance of both SI and NI, but favor a type of NI in which agents can quickly learn the underlying state.

SPECIFICS OF METHODOLOGY IN THE CLASSICAL AND NEOCLASSICAL 
 OF ECONOMIC THEORY

The classical direction of economic theory is the direction of economic thought, within which the emergence and development of a market system was first scientifically studied. It developed a coherent system of economic categories and laws based on the principle of non-intervention of the state in the market economy and support for competition. This direction is considered revolutionary, since its results are relevant at the present time. The neoclassical direction explores the behavior of the co-called economic man, who seeks to maximize income and minimize costs. The main categories of analysis are limiting values. Representatives of the neoclassical direction developed the theory of unit productivity, equilibrium theory, economic theory of welfare, theory of rational expectations and others.

Modern İktisat Okulları Açışından Makroekonomik Dengeye Ulaşmada Beklentilerin Rolü

New Classicals have developed “Rational Expectations Hypothesis”. This means all economic agents are rational, optimizing and maximizing; they all have access to full information for the decisions they will take, and they will predict future prices correctly, hence make correct maximizing decisions.
 Friedman and Monetarists came up with “Adaptive Expectations Hypothesis” assuming that the workers, when there is an inflation will err in the first period and keep their wages the same; but in the next period they will realize the exact magnitude of the price rise and the fall in their real wage, hence will raise their wages correspondingly. Thus, the effects of monetary policy in reducing unemployment below natural rate of unemployment point will live only for one period; the economy will return to natural rate of unemployment and money supply increase will have only raised prices and wages; with the value of real parameters the same as one period ago.
 New Keynesians have also accepted Rational Expectations Hypothesis, which is obviously contrary to the Keynesian assumptions in this regard, namely, systematic under-estimation of future prices on the part of workers, as well as uncertainty and non-ergodicity.
 Post-Keynesians presented their assumptions in “Heterogeneous Expectations Hypothesis”. According to Post-Keynesians, entrepreneurs are in a better position than workers to obtain full information and estimate future prices correctly. The workers are less knowledgeable and generally end up under-estimating future prices.

Industrial Development and Economic Growth Nexus in Nigeria

Purpose. Industrial development is crucial in converting all resources to humanity’s use and benefits. Economists observe that the development and utilisation of the industrial sector are essential in a country’s economic growth. Disaggregating the industrial sector into various components, this paper empirically analyses the performance of the industrial sector on economic growth in Nigeria over the 1970-2015 period. Hence, to evaluate the relationship between industrial development and economic growth in Nigeria. Design/Methodology. The paper adopted autoregressive distributed lag (ARDL) as the technique of data analysis. Findings and implications. The results further revealed that the coefficients of all industrial subsectors, such as manufacturing, solid minerals and crude petroleum and gas, have positive and statistically significant influences on economic growth in both the short and long run. Among the industrial subsectors, the crude petroleum and gas sector appears to be the highest driver of Nigerian economic growth compared to other industrial subsectors, showing that the Nigerian economy is still far from diversified. Limitations. Limitation emanates from the problem of missing data from the source of data on the variable labour. However, effort has been made to overcome this challenge by applying a two-year moving average gap for periods of missing data. This method conforms to the rational expectation hypothesis (Muth, 1961). Originality. The development of the industrial sector of any economy can be measured by the contribution of various components (Isiksal & Chimezie, 2016). It is expected that as an economy becomes transformed, the share of industrialisation should be increasing (UNECA, 2011). The examination of industrial sector performance involves its sectoral components.

Two Decades of Research on Consumer Behaviour and Analytics

The present study is a systematic literature review that identifies the context of consumer behaviour and analytics in business to forecast the future of consumer behaviour with changing business trends through TCCM (theory, context, characteristics, method) guidelines. The authors identified that prior research used theories in different disciplines to explain the phenomenon in customer behaviour and analytics literature. When considering the theory, these phenomena often can be segregated based on the industry (e.g., marketing, advertising, sales, healthcare, human resource management, tourism), focusing on status-based mechanisms (e.g., cross-gaming predictive models), inertia-based mechanisms (e.g., theory of rational expectations and adaptive learning), or relationship-based mechanisms (e.g., theory of consumer engagement behaviour).

Lucas and Friedman: The Challenges of Rational Expectations-Based Monetary Cycles for Adaptive Expectations-Based Monetary Long Trends

ABSTRACT The paper argues that Lucas (1972. ‘Expectations and the Neutrality of Money.’ Journal of Economic Theory 4 (2): 103–124) played a significant role in changing Friedman’s theoretical propositions of the 1970s, and that his restatement of Friedman’s (1968b. Dollars and Deficits. Inflation, Monetary Policy and the Balance of Payments. Englewood Cliffs: Prentice-Hall International) address on monetarism helped Friedman refine his argument, regarding both theory and policy-making, in a consistent manner. First, the adoption of the rational expectations hypothesis eventually led to a confrontation with Friedman, whose own approach to probability, based on subjective uncertainty, originated in his early joint work with Savage. Second, Lucas’ modelling of the aggregate supply function undermined Friedman’s earlier approach to the interrelationships between prices and quantities, but also helped remind Friedman of his Marshallian lineage. Lastly, Lucas’s monetary cycle theory, based on an extraction signal problem that was quickly criticized and abandoned, compelled Friedman to give a firmer theoretical foundation to his monetary policy rule based on a constant rate of growth in money supply, thanks to his earlier approach of subjective uncertainty and personal probability.

When Do Security Markets Aggregate Dispersed Information?

We attempt to replicate a seminal paper that offered support for the rational expectations hypothesis and reported evidence that markets with certain features aggregate dispersed information. The original results are based on only a few observations, and our attempt to replicate the key findings with an appropriately powered experiment largely fails. The resulting poststudy probability that market performance is better described by rational expectations than the prior information (Walrasian) model under the conditions specified in the original paper is very low. As a result of our failure to replicate, we investigate an alternate set of market features that combines aspects of the original experimental design. For these markets, which include both contingent claims and homogeneous dividend payments (as in many prediction markets), we do find robust evidence of information aggregation in support of the rational expectations model. In total, our results indicate that information aggregation in asset markets is fragile and should only be expected in limited circumstances. This paper was accepted by Bruno Biais, finance. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2022.4463 .

Consumer Sentiment in Turkey, from Closure to the New Normal

The main aim of the study was to analyze consumer sentiment in the COVID-19 pandemic period in the context of Turkey. In this context, “expectations of consumers regarding the changes in their current income and general expenditures in the economic conditions brought along with normalization process” and “in what direction consumer sentiment would change in the 6-month period following the normalization process in Turkey” were investigated. Based on these research questions, a descriptive study was conducted by adopting a quantitative research method. The questionnaire method was employed in the collection of the study data. As the COVID-19 pandemic was still ongoing when the study was conducted, the data were collected through an online questionnaire by using the convenience sampling method. The data that were obtained from 1147 participants were analyzed by using descriptive statistics through SPSS 24 software. The results that were obtained demonstrated that almost half of the consumers anticipated a decrease in their income in the 6-month period following the normalization process, and that they expected their expenditures would be reduced. In addition, it was determined that consumers were pessimistic in terms of the potential changes that would occur in their personal savings and family living conditions. Hence, it was found that consumers did not expect a considerable improvement in their economic and living conditions in the 6-month period following the normalization process. As the results that were obtained from consumers’ expectations were conscious estimations, as discussed in the assumption of rational expectations theory, they support the estimations of this economic theory.

Income expectations during the lockdown: evidence from a student survey

ABSTRACT We investigate the effect of the COVID-19 pandemic on students’ perception of future economic conditions. Our results show that students’ perception of the current situation is a strong predictor of future expectations. Moreover, students whose parents are self-employed seem to be more concerned about the future. We also detect that an increase in anxiety due to the pandemic and lockdown leads to negative expectations. We find that students seem to anticipate the long run effects of the pandemic by having increasingly pessimistic expectations about the future. This appears to be in line with both rational expectation theory, in which they consider the current situation as a signal for long-run decrease of future expectations, and at the same time, with adaptive expectation schemes anchored by their knowledge on historical pandemic situations.

Grower decision-making factors in adoption of specialty cultivars: A case study of potatoes in the San Luis Valley.

Potatoes are the most consumed vegetable worldwide and play an important role in the U.S. economy. Growers make critical decisions each year in choosing which cultivar to grow, based on factors such as yield, resilience to the growing environment, and utility in the food industry. Current research supports the finding that less-common specialty cultivars (SCs) have benefits for human health. However, growers have been slow to adopt SCs into mainstream operations. Here, we identify major factors in the decision-making process that determine whether a population of growers in the San Luis Valley, Colorado, a major potato-growing region, adopt SC potatoes. We used a combination of ethnographic techniques and quantitative methods to examine drivers of adoption. The data demonstrate grower perceptions within potato farming and the complexity of interacting factors in decision-making. An integration of the Theory of Planned Behavior, Rational Expectation Hypothesis, and Diffusion of Innovation models identifies economic and social factors that influence grower decision-making. Growers that were more aware of specialty cultivar innovation and associated consumer demand were more open to SCs adoption. Other influencing factors include a grower’s experience selling a SC in the previous year and access to diverse markets. Based on these data, we developed a new model to explain grower decision-making processes in adopting SCs. The model demonstrates that one current barrier to adoption is access to buyers, including warehouses, retailers, and households. Taken together, this research demonstrates how rational expectations stem from economic outcomes, knowledge, and experience in the potato industry. These results are important in helping to consider opportunities for growers to access new, higher value markets, while also improving consumer access to nutritious cultivars.