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Granger Causality, Rational Expectations and Aversion to Unemployment and Inflation

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  • Hudson, John

Abstract

This paper presents a new test for rational expectations. This is done within the context of public concern, or aversion, over inflation and unemployment. It is found that inflation aversion Granger causes inflation but unemployment aversion does not Granger cause unemployment. This implies both that inflation aversion is partially determined by expected inflation and that such expectations have a rational element. However, rational expectations of unemployment do not determine unemployment aversion. The consequences of these results for political business cycle theory are then examined. Copyright 1994 by Kluwer Academic Publishers

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  • Hudson, John, 1994. "Granger Causality, Rational Expectations and Aversion to Unemployment and Inflation," Public Choice, Springer, vol. 80(1-2), pages 9-21, July.
  • Handle: RePEc:kap:pubcho:v:80:y:1994:i:1-2:p:9-21
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    Cited by:

    1. Gebhard Kirchgässner, 2016. "Voting and Popularity," CREMA Working Paper Series 2016-08, Center for Research in Economics, Management and the Arts (CREMA).

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