Kiel Working Papers, Kiel Institute for World Economics
No 1424:
Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey
Thomas Lux
Abstract: This paper develops a methodology for estimating the
parameters of dynamic opinion or expectation formation processes with
social interactions. We study a simple stochastic framework of a collective
process of opinion formation by a group of agents who face a binary
decision problem. The aggregate dynamics of the individuals' decisions can
be analyzed via the stochastic process governing the ensemble average of
choices. Numerical approximations to the transient density for this
ensemble average allow the evaluation of the likelihood function on the
base of discrete observations of the social dynamics. This approach can be
used to estimate the parameters of the opinion formation process from
aggregate data on its average realization. Our application to a well-known
business climate index provides strong indication of social interaction as
an important element in respondents' assessment of the business climate
Keywords: business climate, business cycle forecasts, opinion formation, social interactions; (follow links to similar papers)
JEL-Codes: C42,; D84,; E37; (follow links to similar papers)
40 pages, June 2008
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