RDP 8810: The Relationship Between Actual Investment and Survey-Based Expectations 1. Introduction

Given the importance of business investment in determining short-term cyclical movements in output and long-term economic growth, a large econometric literature has emerged in an attempt to reconcile movements in investment with some underlying theory. Attention has increasingly focused on the role of expectations in determining investment decisions. In this paper we use survey-based expectations data to examine how surprises in expectations affect the realisation of investment plans.

The plan of the paper is as follows. A brief review of the approaches to modelling investment and their performance is given in Section 2. The application of survey-based expectations to the forecasting of business investment is derived in Section 3. The estimation results are discussed in Section 4. A final section provides some concluding comments.

We find that a large part of the differences between investment survey expectations and actual outcomes can be explained by the expectation errors in short-term interest rates and cyclical factors.