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Fabio Milani

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

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

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Book part

Fabio Milani and Ashish Rajbhandari

Empirical work in macroeconomics almost universally relies on the hypothesis of rational expectations (RE).This chapter departs from the literature by considering a…

Abstract

Empirical work in macroeconomics almost universally relies on the hypothesis of rational expectations (RE).

This chapter departs from the literature by considering a variety of alternative expectations formation models. We study the econometric properties of a popular New Keynesian monetary DSGE model under different expectational assumptions: the benchmark case of RE, RE extended to allow for “news” about future shocks, near-RE and learning, and observed subjective expectations from surveys.

The results show that the econometric evaluation of the model is extremely sensitive to how expectations are modeled. The posterior distributions for the structural parameters significantly shift when the assumption of RE is modified. Estimates of the structural disturbances under different expectation processes are often dissimilar.

The modeling of expectations has important effects on the ability of the model to fit macroeconomic time series. The model achieves its worse fit under RE. The introduction of news improves fit. The best-fitting specifications, however, are those that assume learning. Expectations also have large effects on forecasting. Survey expectations, news, and learning all work to improve the model's one-step-ahead forecasting accuracy. RE, however, dominate over longer horizons, such as one-year ahead or beyond.

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

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Article

Yang Yang, Mingquan Zhou and Michael Rehm

The purpose of this paper is twofold. First, the study aims to test whether expectations are adaptive in the Auckland housing market. The second purpose is to examine the…

Abstract

Purpose

The purpose of this paper is twofold. First, the study aims to test whether expectations are adaptive in the Auckland housing market. The second purpose is to examine the interplay between expectations and Auckland housing prices.

Design/methodology/approach

In this study, two vector error correction models (VECM) are built: one VECM includes survey-based expectations and another one encompasses model-based expectations with the assumption that property investors’ expectations are adaptive. The paper goes on by comparing and examining the results of Granger causality tests and impulse response analyses.

Findings

The findings reveal that Auckland property buyers’ expectations are adaptive. In addition, this study provides some evidence of a feedback cycle between Auckland housing prices and expectations.

Research limitations/implications

This study posits that Auckland property buyers’ expectations in the next 12 months are based on three-year price movements with more emphasis being placed on recent price history. This assumption may not be an accurate reflection of true expectations.

Practical implications

This paper helps policymakers to deepen their understanding of Auckland property buyers by showing that their expectations form through the extrapolation of the past price trend.

Originality/value

The study possibly marks the first attempt to test and compare the relationship between housing prices and two forms of expectations: survey-based and model-based. Additionally, this study is probably the first one that empirically examines whether there is a feedback cycle between expectations and property prices in the Auckland housing market.

Details

International Journal of Housing Markets and Analysis, vol. 13 no. 4
Type: Research Article
ISSN: 1753-8270

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Article

Sandun Perera and Beverly Waller Dabney

Providing care that is patient-centered is an important objective in the modern healthcare industry. Despite this objective, hospital inpatient case managers and the…

Abstract

Purpose

Providing care that is patient-centered is an important objective in the modern healthcare industry. Despite this objective, hospital inpatient case managers and the services they provide are evaluated routinely without including patients' perspectives. Therefore, the purpose of this study is to fill this research gap by using patient expectations and perceptions to assess the overall quality of and patient satisfaction with hospital case management services.

Design/methodology/approach

This paper investigates five dimensions of case management services – reliability, responsiveness, assurance, empathy and tangibles – and how they affect overall quality and patient satisfaction. Study surveys are based on the SERVQUAL instrument. Survey data from a cross-sectional sample of 67 inpatients are analyzed using principal component analysis, confirmatory factor analysis, GAP analysis and a predictive model.

Findings

The preliminary part of the study identifies “tangibles” and “nontangibles” – reliability, responsiveness, assurance and empathy – as the main components. Among these two components, only nontangibles have a positive and significant effect on both quality and patient satisfaction according to patient perspectives. GAP analysis indicates that gaps between patient expectations and perceptions of reliability and assurance are significant. Finally, the proposed predictive model reveals that gaps in assurance have a significant impact on both overall quality and satisfaction, while gaps in empathy have a significant impact on satisfaction, but not overall quality.

Originality/value

Studies on service quality at the case manager level are limited. This study is the first in this domain to evaluate quality and satisfaction from the patient perspective.

Details

Journal of Health Organization and Management, vol. 34 no. 5
Type: Research Article
ISSN: 1477-7266

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Article

Jörgen Hellström, Rickard Olsson and Oscar Stålnacke

The purpose of this paper is to measure individual investors’ expectations of risk and return and to evaluate different expectation measures.

Abstract

Purpose

The purpose of this paper is to measure individual investors’ expectations of risk and return and to evaluate different expectation measures.

Design/methodology/approach

The authors measure individual investors’ expectations of risk and return regarding an index fund and two stocks using survey data on a random sample of individual investors in Sweden. The survey contains three different return and four different risk expectation measures. To evaluate the different expectation measures, three different evaluation perspectives are considered.

Findings

The risk expectations obtained from the different measures are positively correlated across respondents, but their average magnitudes differ considerably across measures. The return expectations are also positively correlated, and their magnitudes also differ, but to a lesser extent. Consequently, the same individual can express risk expectations that either underestimate or overestimate the forward risk, depending on the measure that is used. The variations in the expectations mainly relate to differences in the responses to the questions underlying the different measures, rather than to the methods used to obtain the expectations. The results from the evaluation of the measures indicate that the expectation measure proposed by Dominitz and Manski (2011) is the only measure for which it is possible to distinguish between individuals’ expectations, using all three of the evaluation perspectives.

Originality/value

This is, to the best of the authors’ knowledge, the first paper that evaluates different survey measures of individual investors’ expectations of risk and return.

Details

Review of Behavioral Finance, vol. 9 no. 3
Type: Research Article
ISSN: 1940-5979

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Article

Saakshi Saakshi and Sohini Sahu

The Inflation Expectations Survey of Households, conducted by the Reserve Bank of India (RBI), indicates that there is considerable disparity in inflation expectations

Abstract

Purpose

The Inflation Expectations Survey of Households, conducted by the Reserve Bank of India (RBI), indicates that there is considerable disparity in inflation expectations across cities in India. The purpose of this paper is to investigate why different cities exhibit heterogeneous inflation expectations despite coming under a central monetary policy umbrella.

Design/methodology/approach

First, the correspondence between city-level inflation expectations and city-specific economic characteristics is mapped. Second, how the disagreement in inflation expectations across cities, measured by dispersion, behaves over the business cycle is investigated. Finally, using seemingly unrelated regression technique, the economic factors that play a role in explaining inflation expectations heterogeneity across cities are estimated.

Findings

Cities with higher economic activity and cost of living have higher inflation expectations. Disagreement across cities regarding inflation expectations rise with an increase in output gap and inflation. Information friction plays an important role in explaining the disparity in inflation expectations across cities, and the effects of macro-level factors vary across cities, thereby accentuating expectations dispersion.

Research limitations/implications

Monetary policy-related communication by the RBI (toward the general public) should increase in order to address information friction, which, in turn, would temper down the extent of inflation expectations heterogeneity across cities in India.

Originality/value

This is a novel application of the data from the monetary policy perspective. Heterogeneity in inflation expectations across cities or regions is an unexplored area. The use of nightlights as a proxy for city-level economic activity in India (in absence of data on city-level income) is another original contribution.

Details

Journal of Economic Studies, vol. 46 no. 5
Type: Research Article
ISSN: 0144-3585

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Ashima Goyal and Prashant Parab

The authors model heterogeneity of inflation expectations across Indian households using the Inflation Expectations Survey of Households data set. Using Carroll-type…

Abstract

The authors model heterogeneity of inflation expectations across Indian households using the Inflation Expectations Survey of Households data set. Using Carroll-type epidemiological models and pooled cross sectional analyses, the authors find that women, homemakers, older people and Tier 2 and 3 city dwellers tend to have higher inflation expectations compared to their counterparts. In the epidemiological model-based analysis, these very cohorts display higher speed of adjustment to news. Overall higher relative adjustment speeds point to the significance of central bank communications.

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Article

Annalisa Ferrando, Ioannis Ganoulis and Carsten Preuss

This paper explores how firms formed their expectations about the availability of bank finance since the financial crisis. Various expectations hypotheses that incorporate…

Abstract

Purpose

This paper explores how firms formed their expectations about the availability of bank finance since the financial crisis. Various expectations hypotheses that incorporate backward and/or forward-looking elements and inattention are tested. From a policy perspective, the most important hypothesis is whether policy announcements have a direct impact on the expectations of companies.

Design/methodology/approach

The analysis is based on a large sample of euro area companies from the ECB “Survey on the Access to Finance of Enterprises” between 2009 and 2018. Ordered logit models are used to relate individual replies on expectations to firms' information available at the time of the forecasts. The model controls for the business cycle and firms' structural characteristics. Using a difference-in-differences approach, we test how policy announcements may affect expectations.

Findings

Firms update what otherwise look like adaptive expectations on the basis of new information. The hypothesis of rational expectations is rejected. Moreover, we do not find evidence of inattention or of a wave of pessimism/optimism. The analysis of expectations around the time of the ECB Outright Monetary Transactions program provides some evidence of forward-looking expectations.

Originality/value

The paper contributes to the literature on expectations by using a novel survey in eleven countries. In the multi-country setting, country-specific business cycle effects and waves of pessimism or optimism are better controlled for. The policy announcements of summer 2012 provide for a natural experiment to test the direct impact of such announcements on expectations, an issue of relevance for the monetary policy transmission to economic activity.

Details

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

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Content available
Article

Oscar Stålnacke

The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market.

Abstract

Purpose

The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market.

Design/methodology/approach

The author combines survey and registry data on individual investors in Sweden to obtain 11 sophistication proxies that previous research has related to individuals’ financial decisions. These proxies are related to a survey measure regarding individual investors’ expectations of risk and return in an index fund using linear regressions.

Findings

The findings in this paper indicate that sophisticated investors have lower risk and higher return expectations that are closer to objective measures than those of less-sophisticated investors.

Originality/value

These results are important, since they enhance the understanding of the underlying mechanisms through which sophistication can influence financial decisions.

Details

Review of Behavioral Finance, vol. 11 no. 1
Type: Research Article
ISSN: 1940-5979

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Book part

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…

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

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