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Do economists expect too much from expectations?

Weale, Martin (2021) Do economists expect too much from expectations? National Institute Economic Review, 255. pp. 25-41. ISSN 0027-9501

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Identification Number: 10.1017/nie.2020.47

Abstract

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.

Item Type: Article
Additional Information: © 2021 SAGE Publications Ltd. All rights reserved.
Divisions: Economics
Date Deposited: 27 Jan 2022 15:30
Last Modified: 01 Feb 2022 08:39
URI: http://eprints.lse.ac.uk/id/eprint/113565

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