ABSTRACT

The importance of expectations is a central tenet of modern economics.2 Expectations are seen as essential to the transmission mechanism of monetary policy and are key to inflation targeting frameworks.3 For empirical economists, this has generated the fundamental challenge of seeking ways to measure these “animal spirits”, in the words of Keynes. Simply assuming rational expectations is indefensible in empirical work. The hypothesis has been rejected by data directly (see inter alia Roberts 1997; Bakhshi and Yates 1998; Łyziak 2003) and indirectly (Ericsson and Irons 1995).4