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Rational expectations and M2 demand

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  • Russell Rhine

Abstract

This essay expands on existing studies of M2 money demand. It differs in that it applies a rational expectations approach to an adaptive expectation model. Unlike the adaptive expectations models, the author includes an explanatory variable for expectations of future inflation. The expectation variables used are: the actual inflation rate (t + 1) and the Livingston Survey from the Philadelphia Fed. By using the different measures of expectations the author is able to compare several adaptive expectations models that appear in the literature and the rational expectations models for fit and forecast ability. The empirical results are such that the importance of including the rational expectations variable is evident even though the overall fit of the equation is comparable to one of the existing adaptive expectations models. Copyright International Atlantic Economic Society 2003

Suggested Citation

  • Russell Rhine, 2003. "Rational expectations and M2 demand," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(2), pages 163-166, May.
    • Handle: RePEc:kap:iaecre:v:9:y:2003:i:2:p:163-166:10.1007/bf02295717
    DOI: 10.1007/BF02295717
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    References listed on IDEAS

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    1. Mehra, Yash P, 1993. "The Stability of the M2 Demand Function: Evidence from an Error-Correction Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 455-460, August.
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