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The Use of Expected Future Variables in Macroeconometric Models

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Abstract

A more sophisticated expectational hypothesis than is traditionally used in the specification of macroeconometric models is tested in this paper. Economic agents are assumed to use a vector of variables Z_{t} in forming their expectations for periods t+1 and beyond. These expectations may or may not be rational in the Muth sense. The results provide some evidence in favor of the more sophisticated hypothesis, but they are not strong enough to allow much weight to be put on the hypothesis as yet. The evidence in favor of the hypothesis is strongest for households' response to future wages and prices in their consumption and labor supply decisions and for the Fed's response to future inflation rates. The sensitivity of the policy properties of my macroeconometric model to the more sophisticated hypothesis is also examined in the paper. The properties are not sensitive for a policy action in which government expenditures are changed. They are somewhat sensitive for an action in which personal tax rates are changed. In the latter case the properties are also sensitive to whether or not the policy action is anticipated.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 718.

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Length: 34 pages
Date of creation: May 1984
Date of revision:
Handle: RePEc:cwl:cwldpp:718

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Keywords: Macroeconometric models; expectations; macro policy; rational expectations;

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  1. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
  2. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. Amemiya, Takeshi, 1974. "The nonlinear two-stage least-squares estimator," Journal of Econometrics, Elsevier, vol. 2(2), pages 105-110, July.
  5. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May.
  6. Fair, Ray C, 1979. "An Analysis of a Macro-Econometric Model with Rational Expectations in the Bond and Stock Markets," American Economic Review, American Economic Association, vol. 69(4), pages 539-52, September.
  7. Ray C. Fair, 1984. "Effects of Expected Future Government Deficits on Current Economic Activity," Cowles Foundation Discussion Papers 693, Cowles Foundation for Research in Economics, Yale University.
  8. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
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Cited by:
  1. Ray C. Fair, 1987. "Sources of Output and Price Variability in a Macroeconometric Model," Cowles Foundation Discussion Papers 815, Cowles Foundation for Research in Economics, Yale University.
  2. Ray C. Fair, 1986. "Interest Rate and Exchange Rate Determination," Cowles Foundation Discussion Papers 810, Cowles Foundation for Research in Economics, Yale University.

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