Experimental evidence on inflation expectation formation

Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.     

House price dynamics: Fundamentals and expectations

We investigate whether expectations that are not fully rational have the potential to explain the evolution of house prices and the price-to-rent ratio in the United States. First, a stylized asset-pricing model solved under rational expectations is used to derive a fundamental value for house prices and the price–rent ratio. Although the model can explain the sample average of the price–rent ratio, it does not generate the large and persistent fluctuations observed in the data. Then, we consider a rational bubble solution, an extrapolative expectations solution and a near rational bubble solution. In this last solution agents extrapolate the future from the latest realizations and the degree of extrapolation is stronger in good times than in bad times, generating waves of over-optimism. We show that under this solution the model not only is able to match key moments of the data but can also replicate the run up in the U.S. house prices observed over the 2000–2006 period and the subsequent sharp downturn.     

AGRICULTURAL PRICE INSTABILITY: A SURVEY OF COMPETING EXPLANATIONS AND REMEDIES

Abstract There are two explanations for agricultural price dynamics. One follows cobweb logic and models fluctuations driven by expectation errors but emphasises that these expectations create complex dynamics and possibly chaos. The other stems from the rational expectations tradition of dynamics driven by real shocks. The empirical evidence tends to support the latter, but is not conclusive. The rational expectations model generates an optimal dynamic path from which no improvement can be expected from public intervention. However, if we take account of all the potential market failures in agricultural markets, and especially in developing countries, this conclusion might require some qualifications, although an appropriate policy design for stability has still to be achieved. This paper surveys the positive and normative literature on agricultural prices, highlighting empirical evidence and identifying remaining unresolved issues.     

Binary choice under social interactions: an empirical study with and without subjective data on expectations

This paper examines two methods of modeling binary choice with social interactions: models assuming homogeneous rational expectations and models using subjective data on expectations. Exploiting a unique survey conducted during the 1996 US presidential election that was designed to study voting behavior under social context, we find that in various model specifications using subjective expectations consistently improves models' goodness‐of‐fit; and that subjective expectations are not rational as formulated by Brock and Durlauf. Specifically, members' characteristics are individually important in forming expectations. We also include correlated effect in the rational expectation model. This extension provides a remedy to the selection issues that often arise in social interaction models. Copyright © 2008 John Wiley & Sons, Ltd.     

Examining the credibility of macroeconomic forecasts: Null of cointegration approach

In this study we examine the accuracy of forecasts of a select group of major macroeconomic variables, representing both the real and the financial sector of the economy. The theoretical foundations are similar to the one used to study exchange rate expectations, i.e. a verification of consistency and rationality in forecast formation. The empirical measure of accuracy is consistency in the expectation formation process, a precursor to rational forecasts. Here we examine the cointegration properties of the actual and forecast series (at multiple horizons) using the modern null of cointegration approach. A very reliable and continuos data set, the ASA-NBER survey is used. We find evidence of short (long) term expectational consistency (inconsistency) i.e. bandwagon effects and a mean reversion tendency in case of real variables, while the forecasts of financial variables are inconsistent across all forecast horizons.     

Real‐time forecast combinations for the oil price

Baumeister and Kilian (Journal of Business and Economic Statistics, 2015, 33(3), 338–351) combine forecasts from six empirical models to predict real oil prices. In this paper, we broadly reproduce their main economic findings, employing their preferred measures of the real oil price and other real‐time variables. Mindful of the importance of Brent crude oil as a global price benchmark, we extend consideration to the North Sea‐based measure and update the evaluation sample to 2017:12. We model the oil price futures curve using a factor‐based Nelson–Siegel specification estimated in real time to fill in missing values for oil price futures in the raw data. We find that the combined forecasts for Brent are as effective as for other oil price measures. The extended sample using the oil price measures adopted by Baumeister and Kilian yields similar results to those reported in their paper. Also, the futures‐based model improves forecast accuracy at longer horizons.     

Quasi‐rational and ex ante price expectations in commodity supply models: an empirical analysis of the US broiler market

A statistically optimal inference about agents' ex ante price expectations within the US broiler market is derived using futures prices of related commodities along with a quasi‐rational forecasting regression equation. The modelling approach, which builds on a Hamilton‐type framework, includes endogenous production and allows expected cash price to be decomposed into anticipated and unanticipated components. We therefore infer the relative importance of various informational sources in expectation formation. Results show that, in addition to the quasi‐rational forecast, the true supply shock, future prices, and ex post commodity price forecast errors have, at times, been influential in broiler producers' price expectations. Copyright © 2003 John Wiley & Sons, Ltd.     

Expectation formation of older married couples and the rational expectations hypothesis

This paper tests the Rational Expectations (RE) hypothesis regarding retirement expectations of older married American couples, controlling for sample selection and reporting biases. In prior research we found that individual retirement expectation formation was consistent with the Rational Expectation hypothesis, but in that work spousal considerations were not analyzed. In this research we take advantage of panel data on expectations to test the RE hypothesis among married individuals as well as joint expectations among couples. We find that regardless of whether we assume that married individuals form their own expectations taking spouse's information as exogenous, or the reports of the couple are the result of a joint expectation formation process, their expectations are consistent with the RE hypothesis. Our results support a wide variety of models in economics that assume rational behavior of married couples.     

The house price determination process: Rational expectations with a spatial context

Applying the rational expectations hypothesis, this essay models the current value of a house as the conditional expectation of the discounted stream of housing services accruing to the owner of the house. The value of housing services is determined by neighborhood effects as well as the physical attributes of the property itself. In the existing hedonic literature, future transactions have not been utilized to describe neighborhood effects. The rational expectations asset pricing model in this study accounts for expected future neighborhood effects as well as observed current neighborhood effects. The reduced form of the rational expectations model is a spatial autoregressive (SAR) model with two spatial lags. After employing the generalized method of moments (GMM) in estimating the spatial asset pricing model, I find that both expected future transactions and prior transactions in the neighborhood are significant. The inclusion of expected future transaction prices in the neighborhood takes into account the influence of expected changes in the community and factors these potential changes into the current house price. This is consistent with forward-looking households. The forward-looking model generates superior out-of-sample prediction performance relative to both the conventional hedonic model without considering neighborhood effects or the standard spatial hedonic model including only past transactions.     

Rationality,specification tests,and macroeconomic models

Rational expectation models embody cross-equation restrictions that are implied by the theory of rational expectations. In this paper we illustrate how tests of these restrictions may be implemented in terms of general macroeconomic models by employing the models of Taylor and Sargent as examples. In addition, the more important issue of the proper interpretation of the results of these tests is addressed. We contend that tests for rationality should become part of the model-building process as they are akin to specification tests for models in which rational expectations is treated as the maintained hypothesis. A procedure is suggested when the restriction are inconsistent with data. Special emphasis is placed upon examining how changes in specifications of the model's exogenous variables can influence test results.     

Heterogeneous expectations and debt in a growth model for a small open economy

We extend an aggregative growth model for a small open economy by developing a framework in which boundedly rational agents raise credit in proportion to their expected income. Moreover, these agents are heterogeneous in the sense that they switch between an extrapolative and a regressive forecasting rule with respect to perceived market circumstances. Using a mixture of analytical and numerical tools, we attempt to describe the characteristics of our model’s dynamical system. Our results then suggest that self-fulfilling short-run expectations do not only have important consequences for fluctuations in economic activity but are also a source of simple endogenous dynamics.     

Linear Decentralized Control with Expectations

In this paper, we consider a decentralized discrete-time control model with expectations. There are as many decision-makers as scalar state (and control) variables, and each decision-maker forms an expectation on the impact that affects him/her. Using rational and naive expectations, we describe the stability conditions of the alternative expectations. Our results generalized earlier ones by Metzler and Lovell, from an inventory control model to an abstract model, and solve the problem of the generation of a feasible normal path presented by Kornai and Martos.     

Asset pricing with expectation shocks

This paper adds persistent shocks into the adaptive learning expectation formation process in stochastic growth asset pricing production and endowment economies. These expectation shocks, designed to capture psychological elements which can arise from news, changes in sentiment, herding and bandwagon effects, generate waves of optimism and pessimism in equity price forecasts. The paper estimates parameters of the expectation shock and adaptive learning process with the method of simulated moments, and compares simulation results to U.S. economic and financial market stylized facts. Numerical results for both the estimated production and endowment economies show that the expectation shock model matches several of the stylized facts better than does a model that assumes rational expectations or adaptive learning alone.     

Forecasting crude oil prices with DSGE models

In this study, we conducted an oil prices forecasting competition among a set of structural models, including vector autoregression and dynamic stochastic general equilibrium (DSGE) models. Our results highlight two principles. First, forecasts should exploit the fact that real oil prices are mean reverting over long horizons. Second, models should not replicate the high volatility of the oil prices observed in samples. By following these principles, we show that an oil sector DSGE model performs much better at real oil price forecasting than random walk or vector autoregression.     

预期对我国住房市场政策调控效果影响的实证分析

预期对房地产行业调控政策的实施效果有着重要的作用。一般来说,从形成机制可以把预期分为静态预期、外推型预期、适应性预期和理性预期,而我国的房地产市场因其特殊性,是介于适应性预期与理性预期之间的准理性预期。通过建立住房价格调控模型并进行实证分析后,可以发现准理性预期是一种效果较好且与实际更相符的预期;预期是影响房价的最主要因素,而预期对于房价的放大效应和预期的不稳定性又使得政策调控增加了一定的难度;房价基本上与预期成正比关系。     

Solving DSGE portfolio choice models with dispersed private information

Noisy rational expectations models, in which agents have dispersed private information and extract information from an endogenous asset price, are widely used in finance. However, these linear partial equilibrium models do not fit well in modern macroeconomics that is based on non-linear dynamic general equilibrium models. We develop a method for solving a DSGE model with portfolio choice and dispersed private information. We combine and extend existing local approximation methods applied to public information DSGE settings with methods for solving noisy rational expectations models in finance with dispersed private information.     

A New Keynesian model with staggered price and wage setting under learning

This paper provides a study of the implications for economic dynamics when the central bank sets its nominal interest rate target in response to variations in wage inflation. I provide results on the existence, uniqueness, and stability under learning of rational expectations equilibrium for alternative specifications of the manner in which monetary policy responds to economic shocks when nominal rigidities are present. Monopolistically competitive producers set prices via staggered price contracts, and households set nominal wages in the same fashion. In this setting, the conditions for determinacy and learnability of rational expectations equilibrium differ from a model where only prices are sticky. I find that when the central bank responds to wage and price inflation and to the output gap, a Taylor principle for wage and price inflation arises that is related to stability under learning dynamics. In other words, a moderate reaction of the interest rate to wage inflation helps to avoid instability under learning and indeterminacy.     

Valuation ratios and long‐horizon stock price predictability

Using annual data for 1872–1997, this paper re‐examines the predictability of real stock prices based on price–dividend and price–earnings ratios. In line with the extant literature, we find significant evidence of increased long‐horizon predictability; that is, the hypothesis that the current value of a valuation ratio is uncorrelated with future stock price changes cannot be rejected at short horizons but can be rejected at longer horizons based on bootstrapped critical values constructed from linear representations of the data. While increased statistical power at long horizons in finite samples provides a possible explanation for the pattern of predictability in the data, we find via Monte Carlo simulations that the power to detect predictability in finite samples does not increase at long horizons in a linear framework. An alternative explanation for the pattern of predictability in the data is nonlinearities in the underlying data‐generating process. We consider exponential smooth‐transition autoregressive models of the price–dividend and price–earnings ratios and their ability to explain the pattern of stock price predictability in the data. Copyright © 2005 John Wiley & Sons, Ltd.     

可转换债券市场价格与其基准股票市盈率关系初探

本文试图探讨可转换债券市场价格与其基准股票市盈率间的关系。从理论上分析,市盈率作为一个较易获得的市场指标,包含了上市公司增长机会(growth opportunity)的信息,反映了投资者对未来股价上升的预期。同时可转换债券的价格对其基准股票价格未来上升的可能性十分敏感,因此市盈率与可转换债券市场价格间应存在一定关系。但根据对上海证券交易所转债的实证分析得到:目前我国转债的市场价格与其基准股票市盈率间的关系并不显著,因而市盈率指标不能作为判断转债投资价值的有效依据。     

Equilibrium in incomplete markets: II : Generic existence in stochastic economies

We model multiperiod securities markets with differential information. A price system that admits no free lunches is related to martingales when agents have rational expectations. We introduce the concept of resolution time, and show that a better informed agent and a less informed agent must agree on the resolution times of commonly marketed events if they have rational expectations and if there are no free lunches. It then follows that if all elementary events are marketed for a less informed agent then any price system that admits no free lunches to a better informed agent must eliminate any private information asymmetry between the two. We provide an example of a dynamically fully revealing price system that is arbitrage free and yields elementarily complete markets.