Behavioural Models of Expectations Formation

  • Michael P. Clements
Part of the Palgrave Texts in Econometrics book series (PTEC)


The assumptions that agents have rational expectations, know the true structure of the economy, and have access to the same information have been dropped in favour of models of expectations formation which make less stringent assumptions and demands of agents. Chief amongst these are models which stress the role of information rigidities: agents are assumed to act as rational expectations forecasters given limited information. Either agents do not always update their forecasts to reflect the latest economic news and statistics, or they receive noisy signals regarding the current state of the economy. Because agents are assumed to act rationally given their information sets, they would be expected to pass standard tests of forecast efficiency, such as the orthogonality of their forecasts and forecast errors. But the implications of the informational rigidity models are testable on aggregate quantities, as are extensions to the basic informational rigidity models, and the evidence is reviewed in this chapter. The modelling of individual forecaster behaviour using a Bayesian learning model is also reviewed, including the possibility that forecasters interpret public information differently and that some forecasters might receive superior (more precise) signals.


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© The Author(s) 2019

Authors and Affiliations

  • Michael P. Clements
    • 1
  1. 1.ICMA Centre, Henley Business SchoolUniversity of ReadingWheatleyUK

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