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Article
Publication date: 1 March 2004

Christopher G. Reddick

An exciting opportunity that many advanced industrial democracies faced in the late 1990s was the movement from budgetary deficit to surplus. This came after years of persistent…

Abstract

An exciting opportunity that many advanced industrial democracies faced in the late 1990s was the movement from budgetary deficit to surplus. This came after years of persistent deficits. Traditional decisionmaking theories such as budgetary incrementalism failed to explain this longrun relationship, since it has been inherently a short-run theory. This paper uses rational expectations theory to demonstrate its relationship to budgetary decision-making reforms and the deficit (surplus) for Canada, the UK and the United States. The results demonstrated that there was an intertemporal budget constraint in operation in the three countries, and decision-makers at the macro level used rational expectations in the formulation of their annual budget. In the theory, budget actors strived to balance their budget, but did so over the longrun as opposed to the short-run incrementalist interpretation.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 16 no. 3
Type: Research Article
ISSN: 1096-3367

Article
Publication date: 1 March 1991

David Blake

The different types of estimators of rational expectations modelsare surveyed. A key feature is that the model′s solution has to be takeninto account when it is estimated. The two…

Abstract

The different types of estimators of rational expectations models are surveyed. A key feature is that the model′s solution has to be taken into account when it is estimated. The two ways of doing this, the substitution and errors‐in‐variables methods, give rise to different estimators. In the former case, a generalised least‐squares or maximum‐likelihood type estimator generally gives consistent and efficient estimates. In the latter case, a generalised instrumental variable (GIV) type estimator is needed. Because the substitution method involves more complicated restrictions and because it resolves the solution indeterminacy in a more arbitary fashion, when there are forward‐looking expectations, the errors‐in‐variables solution with the GIV estimator is the recommended combination.

Details

Journal of Economic Studies, vol. 18 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

Book part
Publication date: 22 November 2012

Fabio Milani

This paper surveys the treatment of expectations in estimated Dynamic Stochastic General Equilibrium (DSGE) macroeconomic models.A recent notable development in the empirical…

Abstract

This paper surveys the treatment of expectations in estimated Dynamic Stochastic General Equilibrium (DSGE) macroeconomic models.

A recent notable development in the empirical macroeconomics literature has been the rapid growth of papers that build structural models, which include a number of frictions and shocks, and which are confronted with the data using sophisticated full-information econometric approaches, often using Bayesian methods.

A widespread assumption in these estimated models, as in most of the macroeconomic literature in general, is that economic agents' expectations are formed according to the Rational Expectations Hypothesis (REH). Various alternative ways to model the formation of expectations have, however, emerged: some are simple refinements that maintain the REH, but change the information structure along different dimensions, while others imply more significant departures from rational expectations.

I review here the modeling of the expectation formation process and discuss related econometric issues in current structural macroeconomic models. The discussion includes benchmark models assuming rational expectations, extensions based on allowing for sunspots, news, sticky information, as well as models that abandon the REH to use learning, heuristics, or subjective expectations.

Details

DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments
Type: Book
ISBN: 978-1-78190-305-6

Keywords

Article
Publication date: 2 March 2012

Franz Fuerst and Anna‐Maija Grandy

Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper is to…

1842

Abstract

Purpose

Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper is to study the central London office market from 1987 to 2009 and test for evidence of rational, adaptive and naive expectations.

Design/methodology/approach

Two parallel approaches are applied to test for either rational or adaptive/naive expectations: vector auto‐regressive (VAR) approach with Granger causality tests and recursive OLS regression with one‐step forecasts.

Findings

Applying VAR models and a recursive OLS regression with one‐step forecasts, the authors do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, the results confirm that developer decisions are explained, to a large extent, by contemporaneous and historic conditions in both the City and the West End, but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.

Research limitations/implications

More generally, the results of this study suggest that real estate cycles are largely generated endogenously rather than being the result of large demand shocks and/or irrational behaviour.

Practical implications

Developers may be able to generate excess profits by exploiting market inefficiencies but this may be hindered in practice by the long periods necessary for planning and construction of the asset.

Originality/value

This paper focuses the scholarly debate of real estate cycles on the role of expectations. It is also one of very few spatially disaggregate studies of the subject matter.

Book part
Publication date: 12 November 2014

Tiziana Assenza, Te Bao, Cars Hommes and Domenico Massaro

Expectations play a crucial role in finance, macroeconomics, monetary economics, and fiscal policy. In the last decade a rapidly increasing number of laboratory experiments have…

Abstract

Expectations play a crucial role in finance, macroeconomics, monetary economics, and fiscal policy. In the last decade a rapidly increasing number of laboratory experiments have been performed to study individual expectation formation, the interactions of individual forecasting rules, and the aggregate macro behavior they co-create. The aim of this article is to provide a comprehensive literature survey on laboratory experiments on expectations in macroeconomics and finance. In particular, we discuss the extent to which expectations are rational or may be described by simple forecasting heuristics, at the individual as well as the aggregate level.

Details

Experiments in Macroeconomics
Type: Book
ISBN: 978-1-78441-195-4

Keywords

Article
Publication date: 4 September 2020

Francesco Strati

The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a…

Abstract

Purpose

The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a sufficient condition for deleveraging.

Design/methodology/approach

Theoretical approach with neutral deleveraging.

Findings

Findings of the study are defined sufficient conditions for a behavioral rational bubble's formation in a market of collateral and the subsequent deleveraging. The crowd-in effect of the representative bubble is caused by errors in extrapolating information and thus by representativeness, while the crowd-out effect of deleveraging is set off by reverting to a rational heuristic.

Research limitations/implications

The limit is that it is a homogeneous expectations approach, the implication is that cannot be rational speculation.

Practical implications

Even in a simple model of homogeneous expectations a bubble may arise with serious effect on the demand side: models that detect just rational mispricings cannot account for behavioral components that have financial and real effects.

Originality/value

The paper defines how deleveraging may occur even in case of homogeneous expectations. The latter should not be seen just as a limit but also as a signal of the importance of being aware of behavioral components.

Details

Review of Behavioral Finance, vol. 13 no. 5
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 1 September 1993

Shaun Hargreaves Heap

Incorrect inflationary expectations affect the unemployment rate,hence the question of how expectations are formed is crucial. Examinestwo hypotheses which have dominated the…

Abstract

Incorrect inflationary expectations affect the unemployment rate, hence the question of how expectations are formed is crucial. Examines two hypotheses which have dominated the discussion: the adaptive (AEH) and the rational expectations hypothesis (REH). During the 1980s it was assumed that REH was to be preferred to AEH, but various problems with REH have emerged. Focuses on two of these problems: whether participants in the labour market have the requisite information; and the presence of multiple RE equilibria. It may therefore be necessary for agents to co‐ordinate their expectations. Suggests that institutions of the labour market might hold the key to this question of co‐ordination.

Details

International Journal of Manpower, vol. 14 no. 9
Type: Research Article
ISSN: 0143-7720

Keywords

Open Access
Article
Publication date: 17 August 2021

Kashif Rashid, Yasir Bin Tariq and Mamoon Ur Rehman

This study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock…

5473

Abstract

Purpose

This study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock market.

Design/methodology/approach

Using daily trading data of Karachi Stock Exchange-100 index from January 2012 to December 2015, different regression models, including descriptive statistics and stationarity tests, are performed.

Findings

Results indicate that stock market trading has suffered from pessimistic behaviour of investors. In the first model, the authors find a positive sign of confidence and negative sign of optimism with the trading volume. The second model shows a positive role of confidence and rational expectations in affecting the trading volume in daily, Monday and Friday samples. The results of the third model show a negative sign of both optimism and rational expectation with the trading volume. Furthermore, the next model shows a negative sign of confidence combined with pessimism while testing their relationship with the trading volume. Finally, results of the final model suggest that optimism negatively affects the trading volume, and on the other hand, pessimism has a positive impact on the trading volume.

Research limitations/implications

The method and empirical testing of behavioural biases and their relationship with economic variable used in this study seem to be a promising way to better understand the role of psychology in deriving financial decisions for academics and policymakers.

Originality/value

This study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.

Details

Asian Journal of Accounting Research, vol. 7 no. 2
Type: Research Article
ISSN: 2443-4175

Keywords

Article
Publication date: 28 June 2021

Dimitrios Anastasiou and Stelios Giannoulakis

This study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.

Abstract

Purpose

This study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.

Design/methodology/approach

In this study, we link consecutive surveys from the Survey on the Access to Finance of Enterprises to bring new evidence on how non-financial corporations shape their expectations on external finance availability.

Findings

In line with the past literature, we demonstrate that the data reject the Rational Expectations hypothesis, and we find evidence in favor of the Adaptive Expectation mechanism.

Originality/value

This is the first study studying firms' expectations of external finance availability, implementing survey data of firms' expectations from the SAFE database on a country level. The formation of firm expectations is vital in directing policymakers in designing appropriate monetary policies, as both the employment and inflation targets of central banks around the world are highly dependent on the firm-level decision process.

Details

Journal of Economic Studies, vol. 49 no. 5
Type: Research Article
ISSN: 0144-3585

Keywords

Book part
Publication date: 1 July 2015

Marcin Wolski

We test the determinacy properties of the standard and financial-sector-augmented Taylor rules in a new Keynesian model with a presence of banking activities. We extend the basic…

Abstract

We test the determinacy properties of the standard and financial-sector-augmented Taylor rules in a new Keynesian model with a presence of banking activities. We extend the basic fully rational environment to the setting with heterogeneous expectations. We observe that the benefits from extra financial targeting are limited. Financial targeting, if well designed, can compensate for the improper output-gap targeting through the financial-production channel. The analysis demonstrates however possible threats resulting from the misspecification of the augmented rule. A determinate mix of output-gap and inflation weights can turn indeterminate if compensated by too extreme financial targeting. The results are robust to the presence of heterogeneous expectations.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

Keywords

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