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Are Investment Expectations Rational?

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  • Chetan, Dave

Abstract

There is much debate over whether agents form rational expectations of variables or whether they suffer from systematic errors in judgment. This paper estimates models for plant-level survey data in order to test rationality for those manufacturing plants that report expectations of capital expenditures. An advantage of using such data is that rationality is tested in markets where agents may not have knowledge of each others' expectations so strategic motives behind purposefully irrational forecasts are minimized. Statistical estimates and test results suggest that expectations may indeed be rational depending on size. That is to say that the larger a plant is, the more resources it can expend on forecasting its future needs. Thus, the statistical results in this paper validate, for the first time, a class of assumptions in the macroeconomic literature.

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Bibliographic Info

Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2004208e.

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Date of creation: 17 Dec 2004
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Handle: RePEc:stc:stcp3e:2004208e

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Keywords: Business adaptation and adjustment; Business performance and ownership; Financial statements and performance;

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  13. Michael P. Keane & David E. Runkle, 1998. "Are Financial Analysts' Forecasts of Corporate Profits Rational?," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 768-805, August.
  14. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
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Cited by:
  1. Richard A. Ashley., 2006. "Beyond Optimal Forecasting," Working Papers e06-10, Virginia Polytechnic Institute and State University, Department of Economics.

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