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Comparing Expectations and Outcomes: Application to UK Data

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Author Info
YU, Ge

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Abstract

The validity of the rational expectations hypothesis is explored using 12 years direct individual expectations data derived from the BHPS. The usage of micro data drives off the possibility of spurious rejections caused by the existence of micro-heterogeneity. And the 12 years BHPS micro panel data can release the average-out problem in a comparatively short term micro panel data. In short, I test if the individual expectations are unbiased and efficient in a comparatively long term in this paper. As a result, expectations errors are found to be biased and inefficient. Furthermore, the hypothesis that expectations errors are random is investigated by exploring the existence of systematic components in expectations errors. There exists the micro-heterogeneity among different types of respondents. Also, the factors that significantly affect individual’s expectations are identified.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 502.

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Date of creation: 2003
Date of revision: 2005
Handle: RePEc:pra:mprapa:502

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Related research
Keywords: rational expectations systematic heterogeneity forecast errors rational expectations hypothesis subjective

Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation

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  2. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Bonham, Carl S & Cohen, Richard H, 2001. "To Aggregate, Pool, or Neither: Testing the Rational-Expectations Hypothesis Using Survey Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 278-91, July.
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  6. J. Dominitz & C. F. Manski, . "Using expectations data to study subjective income expectations," Institute for Research on Poverty Discussion Papers 1050-94, University of Wisconsin Institute for Research on Poverty. [Downloadable!]
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  7. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September. [Downloadable!] (restricted)
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  12. Simon, Herbert A, 1978. "Rationality as Process and as Product of Thought," American Economic Review, American Economic Association, vol. 68(2), pages 1-16, May.
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