Survey Expectations vs. Rational Expectations in the Estimation of a Dynamic Model: Demand for Labour in Finnish Manufacturing.

Rational expectations of the errors-in-variables type and expectations series quantified from qualitative business survey data are compared in the estimation of a dynamic labor-demand model for the Finnish manufacturing. Replacing future expected values of variables by realizations creates a serially correlated error structure in a rational expectations model. It is shown that when survey expectations are used, this kind of serially correlated error does not appear. Therefore, the estimation of the model is simpler. The empirical results show that the dynamics implied by a simple rational expectations version of the model are not supported by the data. Survey expectations lead to realistic estimates of the parameters of the model. Copyright 1989 by Blackwell Publishing Ltd