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The Use of Expected Future Variables in Macroeconometric Models

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  • Ray C. Fair

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+l 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 tobe 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1445.

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Date of creation: Sep 1984
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Publication status: published as Cowles Foundation Discussion Papers. no 718
Handle: RePEc:nbr:nberwo:1445

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  1. Ray C. Fair, 1984. "Effect of Expected Future Government Deficits on Current Economic Activity," NBER Working Papers 1293, National Bureau of Economic Research, Inc.
  2. Ray C. Fair, 1977. "An Analysis of a Macroeconometric Model with Rational Expectationsin the Bond and Stock Markets," Cowles Foundation Discussion Papers 459, Cowles Foundation for Research in Economics, Yale University.
  3. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
  4. 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.
  5. Amemiya, Takeshi, 1974. "The nonlinear two-stage least-squares estimator," Journal of Econometrics, Elsevier, vol. 2(2), pages 105-110, July.
  6. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
  7. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  8. 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.
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Cited by:
  1. Ray C. Fair, 1986. "Interest Rate and Exchange Rate Determination," NBER Working Papers 2105, National Bureau of Economic Research, Inc.
  2. Ray C. Fair, 1986. "Sources of Output and Price Variability in a Macroeconometric Model," NBER Working Papers 2112, National Bureau of Economic Research, Inc.

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