WORKING PAPERS SERIES
WP07-07
Estimation of a Microfounded Herding
Model On German Survey Expectations
Reiner Franke
Estimation of a Microfounded Herding Model
On German Survey Expectations
June 2007
Abstract
The paper considers the dynamic adjustments of an average opinion index that
can be derived from a microfounded framework where the individual agents
switch between two kinds of sentiment with certain transition probabilities. The
index can thus represent a general business climate, i.e., expectations about the
future course of the economy. This approach is empirically tested with the
survey expectations published by the ZEW and ifo institute. The estimated co-
e!cients make economic sense and are highly significant. In particular, besides
e"ects from fundamental data like the output gap in the recent past, one can
identify a strong herding mechanism within both panels, such that metaphor-
ically speaking the agents do not just join the crowd but follow each single
motion of it. In addition, the transition probabilities of the ZEW agents are
found to be influenced by the ifo climate but not the other way round.
JEL classification: D84, E 32, E 37.
Keywords: Herding dynamics, animal spirits, individual transition probabilities,
ifo and ZEW climate index, Kalman filter.
Contents
1 Introduction
1
2 The dynamic adjustment equation of the climate index
3
2.1 Historical background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
2.2 From microscopic transition probabilities to a macroscopic adjustment equation 4
2.3 Feedbacks in the individual transition probabilities
. . . . . . . . . . . . . .
7
3 Estimation of the climate index
12
3.1 The empirical data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Estimation of a semi-structural model . . . . . . . . . . . . . . . . . . . . . . 16
3.3 First estimations of the structural model . . . . . . . . . . . . . . . . . . . . 20
3.4 Dealing with the problem of imprecise estimates . . . . . . . . . . . . . . . . 24
4 Ex