Efficiency and formation of expectations: evidence from the European investment survey

Konstantinos Drakos

Applied Economics, 2008, vol. 40, issue 8, 1015-1022

Abstract: The European Commission conducts an annual survey regarding planned and realized business fixed investment across various manufacturing sectors in Euroland. In this study we investigate the predictive content of survey-based expectations on investment. In addition, we empirically test the rationality of respondents both in a time series as well as in a panel context. According to our results, based on pooling the data, efficiency is rejected since expectations are biased predictors of actual outcomes. Furthermore, expectations revisions are found to be correlated with components of the information set known at the time of decision making. Finally, our results qualify regressive expectations as the mechanism that more adequately describes the formation of expectations.

Date: 2008
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DOI: 10.1080/00036840600771189

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