Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey

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Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey

Author Info

Thomas Lux

Abstract

This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals' decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents' assessment of the business climate

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1424.

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Length: 40 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:kie:kieliw:1424

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Find related papers by JEL classification:
C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-06-21 (All new papers)
NEP-ECM-2008-06-21 (Econometrics)
NEP-ENV-2008-06-21 (Environmental Economics)
NEP-MAC-2008-06-21 (Macroeconomics)

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