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Assessing the Rationality of Survey Expectations: The Probability Approach

  • Jörg Breitung

    ()

    (University of Bonn)

This paper considers popular methods for the quantification of survey expectations.We investigate the asymptotic properties of two variants of the probability approach originally suggested by Carlson and Parkin (1975). It is argued that the traditionalmethod can be interpreted as an instrumental variable estimator that suffers from a severe loss of efficiency if the mean of the target variable is close to zero. The regression approach advocated by Pesaran (1984) can be seen as a special case assuming that expectations of survey participants are uniformly distributed. Applying alternative variants of these approaches to the ZEW survey of expected changes in the inflation rate demonstrates that the regression variant of the Carlson-Parkin methodology yields the best fit to the realized changes of the inflation rate. It turns out, however, that even the best performing quantification method fails to fulfill the requirement of rational expectations, as the variance of the expectation error is significantly reduced by including additional variables such as the lagged inflation rate.

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Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

Volume (Year): 228 (2008)
Issue (Month): 5+6 (December)
Pages: 630-643

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Handle: RePEc:jns:jbstat:v:228:y:2008:i:5-6:p:630-643
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  1. Dasgupta, Susmita & Lahiri, Kajal, 1992. "A Comparative Study of Alternative Methods of Quantifying Qualitative Survey Responses Using NAPM Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 391-400, October.
  2. Friedrich Heinemann & Katrin Ullrich, 2006. "The Impact of EMU on Inflation Expectations," Open Economies Review, Springer, vol. 17(2), pages 175-195, April.
  3. Jordi Gali & Luca Gambetti, 2008. "On the Sources of the Great Moderation," NBER Working Papers 14171, National Bureau of Economic Research, Inc.
  4. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
  5. Fishe, Raymond P. H. & Lahiri, Kajal, 1981. "On the estimation of inflationary expectations from qualitative responses," Journal of Econometrics, Elsevier, vol. 16(1), pages 89-102, May.
  6. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
  7. Batchelor, R. A., 1981. "Aggregate expectations under the stable laws," Journal of Econometrics, Elsevier, vol. 16(2), pages 199-210, June.
  8. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  9. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data : A Critical Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 645-668, December.
  10. Breitung, Jörg, 1988. "Estimating Binary Probit Models under First Order Serial Correlation," Hannover Economic Papers (HEP) dp-124, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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