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The Effect of Error-Correction on Testing the Rational-Expectations Neutrality Hypothesis

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Author Info
Luigi Ermini
Dongkoo Chang
Abstract

By adopting a VAR framework in first differences, recent literature has confirmed previous results in testing the macro rational-expectations hypotheses of rationality and neutrality: rationality is corroborated, neutrality is rejected. However, this paper shows that, by correctly incorporating a long-run cointegrating relationship between money, output and interest rate in the form of an error-correction term, the test results are reversed, in that neutrality is no longer rejected.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_93-5.pdf
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Publisher Info
Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 199305.

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Length: 7 pages
Date of creation: 1993
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Handle: RePEc:hai:wpaper:199305

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Related research
Keywords: rationality; neutrality; error-correction;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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This page was last updated on 2009-12-22.

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