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Comparing behavioural and rational expectations for the US post-war economy

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  • Liu, Chunping
  • Minford, Patrick

Abstract

The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full reestimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9132.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9132

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Keywords: bank crisis; behavioural expectations; indirect inference; rational expectations;

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Cited by:
  1. Liu, Chunping & Minford, Patrick, 2012. "How important is the credit channel? An empirical study of the US banking crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9142, C.E.P.R. Discussion Papers.
  2. Hatcher, Michael C. & Minford, Patrick, 2013. "Stabilization policy, rational expectations and price-level versus inflation targeting: a survey," Cardiff Economics Working Papers E2013/14, Cardiff University, Cardiff Business School, Economics Section.

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