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Price Determination and Rational Expectations

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  • Petursson, Thorarinn G

Abstract

A forward looking specification of the error correction model is estimated for Icelandic inflation for the period 1962-93. Our results are consistent with the view that prices are set by rational, forward looking firms, reacting to expected future innovations in production costs. The forward model is statistically well determined, and the rational expectations, cross-equation restrictions are accepted. We find that the model has stable and plausible parameter values with a stable VAR expectations generating process. Non-nested tests indicate that the forward looking specification cannot be rejected against a statistically well determined backward looking specification. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

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  • Petursson, Thorarinn G, 1998. "Price Determination and Rational Expectations," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 157-167, April.
  • Handle: RePEc:ijf:ijfiec:v:3:y:1998:i:2:p:157-67
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    Cited by:

    1. Thórarinn G. Pétursson, 2002. "Wage and price formation in a small open Economy: Evidence from Iceland," Economics wp16_thorarinn, Department of Economics, Central bank of Iceland.
    2. Luca Fanelli, 2008. "Testing the New Keynesian Phillips Curve Through Vector Autoregressive Models: Results from the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(1), pages 53-66, February.
    3. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
    4. Guðmundur Guðmundsson, 1998. "A model of inflation with variable time lags," Economics wp02, Department of Economics, Central bank of Iceland.

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