IDEAS home Printed from
   My bibliography  Save this article

Did the US consumer overreact? A test of rational expectations


  • L’Huillier, Jean-Paul


Using data for the US economy from 1995 to 2008, I estimate a business cycle model in which consumers form expectations rationally, and an alternative model that explicitly allows for deviations from rational expectations in the form of overreaction to noisy signals. The second model does not have any advantage in explaining the movements in consumption and productivity in this period. Therefore, I cannot reject the hypothesis that consumers behaved rationally. The rather exuberant movements of this episode are rationalized by a story in which permanent income consumers find it hard to distinguish between permanent movements in productivity and temporary ones. Consumers who update their beliefs about trends in productivity on the basis of fairly noisy signals adjust their behavior very slowly. After the 1995–2000 productivity boom, consumers learnt very slowly about a subsequent decline in productivity growth, which led to financial and trade imbalances that ended in a correction starting around 2007. The whole boom-bust cycle was long, taking about 14 years to complete.

Suggested Citation

  • L’Huillier, Jean-Paul, 2012. "Did the US consumer overreact? A test of rational expectations," Economics Letters, Elsevier, vol. 116(2), pages 207-209.
  • Handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:207-209
    DOI: 10.1016/j.econlet.2012.02.019

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
    2. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    3. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-1483, September.
    4. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Animal spirits; Imperfect information; Boom-bust cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:207-209. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.