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DO ECONOMISTS EXPECT TOO MUCH FROM EXPECTATIONS?

Published online by Cambridge University Press:  16 March 2021

Martin Weale
Martin Weale*
Affiliation:
Department of Political Economy and King’s Business School, King’s College, London, United Kingdom Economic Statistics Centre of Excellence, London, United Kingdom Centre for Macroeconomics, London School of Economics, London, United Kingdom
*
*Corresponding author. Email: martin.weale@kcl.ac.uk
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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.

Keywords

expectationsrationalitybusiness surveysC23C26E31
Type
Research Article
Information
National Institute Economic Review , Volume 255: NEW DIRECTIONS IN SOCIAL SCIENCES AND POLICY IDEAS , February 2021 , pp. 25 - 41
Copyright
© National Institute Economic Review 2021

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