Testing Rationality of Price Expectations on the Basis of Contingency Tables

Abstract

A method of analyzing rationality of expectations of economic agents, based on contingency tables, is applied to price expectations of Polish industrial enterprises. The source of data are surveys designed by the Economic Development Institute of the Warsaw School of Economics within the framework of business conditions surveys in industry. Empirical results clearly show that expectations of Polish entrepreneurs are not formed rationally. Rationality condition has been confirmed in such a limited number of cases that it is not even feasible to differentiate between private and public enterprises as far as rationality of their expectations is concerned. Price expectations seem to be even more irrational that industrial production expectations analyzed earlier.

Keywords: price expectations, rationality, survey data, contingency tables

JEL Classification: C42, C53, D84