The Formation of Producers' Price Expectations in Australia*

Abstract

This paper investigates the formation of price expectations by Australian manufacturing firms. It is shown that the reported expectations are generally consistent with the hypothesis that they are derived as conditional forecasts from the model used by firms in determining their actual price change behaviour. Tests are then undertaken to see whether the expectations are unbiased and efficient forecasts, the cross‐section results indicating generally that they are neither, and hence not rational. Alternative time‐series tests of the unbiasedness and efficiency hypothesis, however, suggest that neither hypothesis can be rejected, implying rationality.

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