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Are Investment Expectations Rational?

  • Chetan, Dave

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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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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  1. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  2. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
  3. Hamermesh, Daniel S, 1992. "A General Model of Dynamic Labor Demand," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 733-37, November.
  4. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
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  7. Abarbanell, Jeffery S., 1991. "Do analysts' earnings forecasts incorporate information in prior stock price changes?," Journal of Accounting and Economics, Elsevier, vol. 14(2), pages 147-165, June.
  8. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
  9. 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.
  10. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 21-40, February.
  11. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-89, September.
  12. Carl S Bonham & Richard H Cohen, 2000. "Testing the Rational Expectations Hypothesis using Survey Data," Working Papers 200007, University of Hawaii at Manoa, Department of Economics.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  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.
  15. 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.
  16. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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