A Note On Muth'S Rational Expectations Hypothesis: A Time-Varying Coefficient Interpretation
AbstractUnder 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 InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 10 (2006)
Issue (Month): 03 (June)
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