Do economists expect too much from expectations?

TY - JOUR

T1 - Do economists expect too much from expectations?

AU - Weale, Martin

N1 - Publisher Copyright: © 2021 SAGE Publications Ltd. All rights reserved. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.

PY - 2021/2

Y1 - 2021/2

N2 - Modern economic theory gives an important role to expectations as an influence on outcomes. This paper reviews evidence on how well measures of expectations conform to outcomes. It confirms earlier results that measures taken from financial markets perform poorly as predictors of outcomes. Looking at the individual responses to the Confederation of British Industry's Industrial Trends Survey, it does find, however, that there are significant correlations between expected and realised outcomes of wages, prices, costs orders and employment. It also finds some evidence that actual prices reflect expected future prices, but with a coefficient much lower than economic theory predicts. There is evidence that forecast errors are explained by past forecasts, as well as revisions to the economic outlook, casting doubt on the idea that firms' forecasts make the best use of the information available at the time. The paper concludes by observing that, while expectations are undoubtedly important, economists need to build on work looking at how they are derived instead of simply assuming they are rational.

AB - Modern economic theory gives an important role to expectations as an influence on outcomes. This paper reviews evidence on how well measures of expectations conform to outcomes. It confirms earlier results that measures taken from financial markets perform poorly as predictors of outcomes. Looking at the individual responses to the Confederation of British Industry's Industrial Trends Survey, it does find, however, that there are significant correlations between expected and realised outcomes of wages, prices, costs orders and employment. It also finds some evidence that actual prices reflect expected future prices, but with a coefficient much lower than economic theory predicts. There is evidence that forecast errors are explained by past forecasts, as well as revisions to the economic outlook, casting doubt on the idea that firms' forecasts make the best use of the information available at the time. The paper concludes by observing that, while expectations are undoubtedly important, economists need to build on work looking at how they are derived instead of simply assuming they are rational.

KW - business surveys

KW - expectations

KW - rationality

UR - http://www.scopus.com/inward/record.url?scp=85102737335&partnerID=8YFLogxK

U2 - 10.1017/nie.2020.47

DO - 10.1017/nie.2020.47

M3 - Article

AN - SCOPUS:85102737335

SN - 0027-9501

VL - 255

SP - 25

EP - 41

JO - NATIONAL INSTITUTE ECONOMIC REVIEW

JF - NATIONAL INSTITUTE ECONOMIC REVIEW

ER -