Testing the rationality of price expectations for manufacturing firms.

The purpose of this paper is to examine whether price expectations satisfy the rationality hypothesis in Muth's sense, using direct observations on price expectations included in the IFO business survey data. The IFO Institute of Munich has been conducting monthly panel surveys for over 5000 manufacturing establishments. They are asked, for one thing, whether their selling prices will increase, remain the same or decrease over the next three months. The question about the actual price changes is also included in the survey. If the problems arising due to the qualitative nature of the data are solved, this unique set of data should provide valuable information for the study of price expectations.
First, the data construction is explained in Section II. Then, Section III contains the development of several statistical measures of forecasting performance for the qualitative data. In Section IV the accuracy and consistency of prediction, are examined. Section V investigates the validity of the rational expectation hypothesis by testing the unbiasedness and efficiency of price expectations. The main empirical findings and their implications are discussed in Section VI. [ABSTRACT FROM AUTHOR]