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The role of beliefs in inference for rational expectations models

  • Lehmann, Bruce N.
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    This paper discusses inference for rational expectations models estimated via minimum distance methods by characterizing the probability beliefs regarding the data generating process (DGP) that are compatible with given moment conditions. The null hypothesis is taken to be rational expectations and the alternative hypothesis to be distorted beliefs. This distorted beliefs alternative is analyzed from the perspective of a hypothetical semiparametric Bayesian who believes the model and uses it to learn about the DGP. This interpretation provides a different perspective on estimates, test statistics, and confidence regions in large samples, particularly regarding the economic significance of rejections in rational expectations models. A suggestive application to the equity premium puzzle is examined.

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    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 150 (2009)
    Issue (Month): 2 (June)
    Pages: 322-331

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    Handle: RePEc:eee:econom:v:150:y:2009:i:2:p:322-331
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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    1. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
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    5. Back, Kerry & Brown, David P., 1992. "GMM, maximum likelihood, and nonparametric efficiency," Economics Letters, Elsevier, vol. 39(1), pages 23-28, May.
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    7. Nicole A. Lazar, 2003. "Bayesian empirical likelihood," Biometrika, Biometrika Trust, vol. 90(2), pages 319-326, June.
    8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    9. Yuichi Kitamura, 2006. "Empirical Likelihood Methods in Econometrics: Theory and Practice," Levine's Bibliography 321307000000000307, UCLA Department of Economics.
    10. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
    11. Yuichi Kitamura, 2006. "Empirical Likelihood Methods in Econometrics: Theory and Practice," Cowles Foundation Discussion Papers 1569, Cowles Foundation for Research in Economics, Yale University.
    12. Kim, Jae-Young, 2002. "Limited information likelihood and Bayesian analysis," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 175-193, March.
    13. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
    14. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, vol. 34(3), pages 305-334, March.
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