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Expectations Formation and Capacity Utilization: Empirical Analyses

Dave, Chetan (2004) Expectations Formation and Capacity Utilization: Empirical Analyses. Doctoral Dissertation, University of Pittsburgh. (Unpublished)

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This dissertation consists of three empirical chapters. The first chapter examines the extent to which real-world agents are rational in making quantitative expectations, an issue over which there is much debate. In this chapter dynamic models for new plant-level survey data are estimated in order to test rationality for manufacturing plants that report expectations of capital expenditures. An advantage of such data is that rationality is tested in environments where agents may not have knowledge of each others' expectations, so strategic motives for biases or inefficiencies are minimized. Model estimates and tests suggest that weak implications of rational expectations are rejected, as are adaptive expectations. The second chapter examines expectations formation in the economists' laboratory as psychologists have documented several biases and heuristics that describe deviations from Bayesian updating-a standard assumption for economists. Indeed, Confirmation Bias predicts that individuals will exhibit systematic errors in updating their beliefs about the state of the world given a stream of information. This chapter examines this bias within a non-strategic environment that motivates experimental subjects financially to provide probability estimates that are close to those of a Bayesian. Subjects revise their estimates of the state of the world as they receive signals. Comparing their estimates to those of a Bayesian shows that subjects display conservatism by underweighting new information. In addition, subjects display confirmation bias by differentiating between confirming and disconfirming evidence. The third chapter seeks to determine, through reduced-form Phillips curves estimates and a structural model, whether the indicator relationship between capacity utilization and inflation has diminished as in recent years high levels of capacity utilization have not led to higher inflation. In Canada, the capacity utilization rate is benchmarked to survey data, thereby providing a unique opportunity to empirically analyze this macroeconomic relationship. Estimates of time-varying parameters and structural break models indicate that there have been breaks over time in the relationship. The timings of the breaks suggest that increasing competitiveness and a rules-based monetary policy may help account for the demise of the relationship. Estimates of a monopolistically competitive sticky-price model economy qualitatively lend credence to this conjecture.


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Item Type: University of Pittsburgh ETD
Status: Unpublished
CreatorsEmailPitt UsernameORCID
Dave, Chetanchdst16@pitt.eduCHDST16
ETD Committee:
TitleMemberEmail AddressPitt UsernameORCID
Committee ChairDeJong, David Ndejong@pitt.eduDEJONG
Committee MemberRichard, Jean-Francoisfantin@pitt.eduFANTIN
Committee MemberDuffy, Johnjduffy@pitt.eduJDUFFY
Committee MemberVesterlund, Lisevester@pitt.eduVESTER
Committee MemberWeber,
Date: 23 September 2004
Date Type: Completion
Defense Date: 19 April 2004
Approval Date: 23 September 2004
Submission Date: 5 August 2004
Access Restriction: No restriction; Release the ETD for access worldwide immediately.
Institution: University of Pittsburgh
Schools and Programs: Dietrich School of Arts and Sciences > Economics
Degree: PhD - Doctor of Philosophy
Thesis Type: Doctoral Dissertation
Refereed: Yes
Uncontrolled Keywords: Confirmation bias; Capacity utilization; Rational expectations
Other ID:, etd-08052004-165334
Date Deposited: 10 Nov 2011 19:57
Last Modified: 15 Nov 2016 13:48


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