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A Note On Muth'S Rational Expectations Hypothesis: A Time-Varying Coefficient Interpretation

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  • SWAMY, P.A.V.B.
  • TAVLAS, GEORGE S.

Abstract

Under certain interpretations of its coefficients, a specified econometric model is an exact representation of the true model, defining the objective probability distribution. This note enumerates these interpretations. In the absence of the conditions implied by these interpretations, the econometric model is misspecified. The note shows that model misspecifications prevent the satisfaction of a necessary and sufficient condition for individual expectations to be rational in Muth s sense. Whereas restrictive forms of econometric models can give very inaccurate predictions, this note describes the conditions under which the predictions generated from time-varying coefficient models coincide with the predictions generated from the relevant economic theory.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 10 (2006)
Issue (Month): 03 (June)
Pages: 415-425

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Handle: RePEc:cup:macdyn:v:10:y:2006:i:03:p:415-425_05

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Cited by:
  1. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer, vol. 31(2), pages 293-306, May.
  2. George Hondroyiannis & P.A.V.B. Swamy & George Tavlas & Michael Ulan, 2008. "Some Further Evidence on Exchange-Rate Volatility and Exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(1), pages 151-180, April.
  3. Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2008. "Inflation dynamics in the euro area and in new EU members: Implications for monetary policy," Economic Modelling, Elsevier, vol. 25(6), pages 1116-1127, November.
  4. Hall, Stephen G. & Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "Assessing the causal relationship between euro-area money and prices in a time-varying environment," Economic Modelling, Elsevier, vol. 26(4), pages 760-766, July.
  5. Stephen G. Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2009. "Where Has All the Money Gone? Wealth and the Demand for Money in South Africa †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(1), pages 84-112, January.

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