A structural analysis of expectation formation. Based on business surveys of French manufacturing industry (Q1202116)

The book is addressed to professional economists who look towards a more systematic utilization of survey data for inferring the main factors at work during the business cycle. The author investigates the production behavior of French manufacturing firms in the short run. The book is structured into two parts. Part One presents an estimation of a simple theoretical model of a firm's production behavior along the lines of the production-smoothing model. Chapter 1 describes thoroughly this model based on the idea that the firms try to smooth production in the face of demand and cost uncertainty. Chapter 2 proposes an errors-in- variables model where the variables of interest are measured with errors through survey data. Chapter 3 presents the estimation method for a general latent variable model for discrete data in two steps: the correlations between the latent measuring variables are estimated from the survey data on the discrete variables by maximum likelihood estimation and then, the parameters of the structural and measurement equations can be estimated using the correlation coefficients and their covariance matrix. Chapter 4 presents the results of the estimation and demonstrates that cost-of-adjusting production plays a crucial role in the production smoothing behavior. Part Two is concerned with testing the Rational Expectation Hypothesis using ad hoc tests. Chapter 5 discusses such procedures for performing direct tests focusing on the relation between the type of data and the relevant test. Chapter 6 makes a first attempt to test the Rational Expectation Hypothesis and the author demonstrates that surprise variables are not reducible to expectational errors. In Chapter 7 a direct test is proposed, using the structure of a latent variable model, and is applied to demand, production and price expectations from the French business survey. The book gives substantial explanations on the described models and also on the overall model. The conclusions drawn at the end of each chapter are pertinent. The author uses many tables and graphics for a more accurate and complete understanding of the study. There are abundant bibliographical references in the text supplemented by an exhaustive bibliography. The subject index at the end of the book is adequate and very useful.