Many rational expectations models state that an economic variable is determined as the present value of future variables. These restrictions have traditionally been tested on VARs where variables appear either in levels (or cointegrating relationships) or first differences. Commonly used test statistics may lead to over-rejections in small samples in the presence of highly persistent variables. Similar problems occur in longhorizon predictive regressions. We propose an alternative method based on local-tounity asymptotic approximations. We apply this method to long-horizon Predictive Regressions, Uncovered Interest Rate Parity, the Term Structure, and the Permanent Income Hypothesis.
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Paper provided by Duke University, Department of Economics in its series Working Papers with number
05-03.
Length: 45 pages Date of creation: 2005 Date of revision: Handle: RePEc:duk:dukeec:05-03
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Find related papers by JEL classification: F30 - International Economics - - International Finance - - - General F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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