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Rational Error Correction

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  • Tinsley, P A

Abstract

Under general conditions, linear decision rules of agents with rational expectations are equivalent to restricted error corrections. However, empirical rejections of rational expectation restrictions are the rule, rather than the exception, in macroeconomics. Rejections often are conditioned on the assumption that agents aim to smooth only the levels of actions or are subject to geometric random delays. Generalizations of dynamic frictions on agent activities are suggested that yield closed-form, higher-order decision rules with improved statistical fits and infrequent rejections of rational expectations restrictions. Properties of these generalized "rational" error corrections are illustrated for producer pricing in manufacturing industries. Copyright 2002 by Kluwer Academic Publishers

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Article provided by Springer & Society for Computational Economics in its journal Computational Economics.

Volume (Year): 19 (2002)
Issue (Month): 2 (April)
Pages: 197-225

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Handle: RePEc:kap:compec:v:19:y:2002:i:2:p:197-225
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Cited by:

  1. Michael Arghyrou & Christopher Martin & Costas Milas, 2003. "Non-linear Inflationary Dynamics: Evidence from the UK," Public Policy Discussion Papers 03-03, Economics and Finance Section, School of Social Sciences, Brunel University.
  2. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc.
  3. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
  4. Philippe Jeanfils & Koen Burggraeve, 2005. "Noname - A new quarterly model for Belgium," Working Paper Research 68, National Bank of Belgium.
  5. Kozicki, Sharon, 2012. "Macro has progressed," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 23-28.
  6. Christopher Martin & Michael Arghyrou & Costas Milas, 2004. "Nonlinear inflation dynamics: evidence from the UK," Money Macro and Finance (MMF) Research Group Conference 2003 59, Money Macro and Finance Research Group.

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