Testing the Rational Expectations Hypothesis in Macroeconometric Models

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Testing the Rational Expectations Hypothesis in Macroeconometric Models

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Fair, Ray C

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Ray C. Fair

Abstract

The rational expectations hypothesis is tested by nesting equations without rational expectations within those with rational expectations. This reduces to whether certain variables in an equation are statistically significant. The test can be regarded as an alternative/supplement to Hendry's test of the expectations mechanism but does not require a complete specification of the expectations equation. It provides an easy way to examine the validity of the rational expectations hypothesis in a model such as S. G. Hall and S. G. B. Henry's (1988), where the hypothesis is used but not tested. The author also examines the sensitivity of the properties of a macroeconometric model to the rational expectations hypothesis. Copyright 1993 by Royal Economic Society.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 45 (1993)
Issue (Month): 2 (April)
Pages: 169-90
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Handle: RePEc:oup:oxecpp:v:45:y:1993:i:2:p:169-90

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Hugo Benítez-Silva & Debra S. Dwyer, 2003. "What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data," Working Papers wp037, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
Diana N. Weymark, 2000. "Using Taylor Rules as Efficiency Benchmarks," Working Papers 0043, Department of Economics, Vanderbilt University, revised Sep 2001. [Downloadable!]
Hugo Benítez-Silva & Debra S. Dwyer & Wayne-Roy Gayle & Thomas J. Muench, 2003. "Expectations in Micro Data: Rationality Revisited," Working Papers wp059, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Papers in Applied Economic Theory 2000-03, Federal Reserve Bank of San Francisco. [Downloadable!]
Other versions:
- Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 14, European Central Bank. [Downloadable!]
- Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society. [Downloadable!]
- Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April. [Downloadable!] (restricted)
Ray C. Fair & John B. Taylor, 1991. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," NBER Technical Working Papers 0078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Ray C. Fair & John B. Taylor, 1989. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Cowles Foundation Discussion Papers 921, Cowles Foundation, Yale University. [Downloadable!]
- Fair, Ray C & Taylor, John B, 1990. "Full Information Estimation and Stochastic Simulation of Models with Rational Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 381-92, Oct.-Dec.. [Downloadable!] (restricted)
SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94. [Downloadable!] (restricted)
Heinemann, Friedrich & Ullrich, Katrin, 2004. "The Impact of EMU on Inflation Expectations," ZEW Discussion Papers 04-01, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
Other versions:
- Friedrich Heinemann & Katrin Ullrich, 2006. "The Impact of EMU on Inflation Expectations," Open Economies Review, Springer, vol. 17(2), pages 175-195, April. [Downloadable!] (restricted)
Ray C. Fair, 1989. "Inflationary Expectations and Price Setting Behavior," NBER Working Papers 3102, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Ray C. Fair, 1989. "Inflationary Expectations and Price Setting Behavior," Cowles Foundation Discussion Papers 923, Cowles Foundation, Yale University. [Downloadable!]
- Fair, Ray C, 1993. "Inflationary Expectations and Price Setting Behavior," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 8-18, February. [Downloadable!] (restricted)
Ray C. Fair, 2001. "On Modeling the Effects of Inflation Shocks," Cowles Foundation Discussion Papers 1300, Cowles Foundation, Yale University, revised Mar 2002. [Downloadable!]
Diana N. Weymark, 2003. "Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates," Working Papers 0310, Department of Economics, Vanderbilt University. [Downloadable!]
Other versions:
- Weymark, Diana N., 2004. "Economic structure, policy objectives, and optimal interest rate policy at low inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 25-51, March. [Downloadable!] (restricted)
Fernando Alexandre & John Drifill & Fabio Spagniolo, 2001. "Inflation Targeting and Exchange Rate Co-ordination," NIPE Working Papers 9/2001, NIPE - Universidade do Minho. [Downloadable!]
W A Razzak, 2002. "Monetary policy and forecasting inflation with and without the output gap," Reserve Bank of New Zealand Discussion Paper Series DP2002/03, Reserve Bank of New Zealand. [Downloadable!]
repec:bep:maccon:v:2:y:2002:i:1:p:1045-1045 is not listed on IDEAS
Ray C. Fair, 2001. "Bootstrapping Macroeconometric Models," Cowles Foundation Discussion Papers 1345, Cowles Foundation, Yale University, revised Jun 2003. [Downloadable!]
Other versions:
- Ray C. Fair, 2002. "Bootstrapping Macroeconometric Models," Yale School of Management Working Papers ysm254, Yale School of Management. [Downloadable!]

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