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Encompassing and rational expectations: How sequential corroboration can imply refutation

  • David F. Hendry

    ()

    (Nuffield College, Oxford, OX1 1NF, UK)

  • Neil R. Ericsson

    ()

    (Stop 24, International Finance Division, Federal Reserve Board, 2000 C Street, N.W., Washington, DC 20551, USA)

Even though pieces of empirical evidence individually may corroborate an economic theory, their joint existence may refute that same theory. Testing of rational expectations models provides a concrete illustration of this principle. Surprisingly, empirical refutation of a rational expectations model may occur without having to estimate that model, and the refutation may be for a large class of expectations-based models and not just for a particular model specification. Narrow money demand in the United Kingdom illustrates such refutation. The general proposition concerning corroboration and refutation strongly favors the building of empirical models that are consistent with all available evidence.

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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 24 (1999)
Issue (Month): 1 ()
Pages: 1-21

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Handle: RePEc:spr:empeco:v:24:y:1999:i:1:p:1-21
Note: received: July 1994/final version received: July 1997
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  1. HENRY, David F. & RICHARD, Jean-François, . "On the formulation of empirical models in dynamic econometrics," CORE Discussion Papers RP -502, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. John Y. Campbell & Robert J. Shiller, 1988. "Interpreting Cointegrated Models," NBER Working Papers 2568, National Bureau of Economic Research, Inc.
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  4. Hendry, David F, 1988. "The Encompassing Implications of Feedback versus Feedforward Mechanisms in Econometrics," Oxford Economic Papers, Oxford University Press, vol. 40(1), pages 132-49, March.
  5. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  6. Hendry, David F, 1985. "Monetary Economic Myth and Econometric Reality," Oxford Review of Economic Policy, Oxford University Press, vol. 1(1), pages 72-84, Spring.
  7. Julia Campos & Neil R. Ericsson, 1988. "Econometric modeling of consumers' expenditure in Venezuela," International Finance Discussion Papers 325, Board of Governors of the Federal Reserve System (U.S.).
  8. Cuthbertson, Keith, 1988. "The Demand for M1: A Forward Looking Buffer Stock Model," Oxford Economic Papers, Oxford University Press, vol. 40(1), pages 110-31, March.
  9. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.).
  10. Hendry, David F & Mizon, Grayham E, 1978. "Serial Correlation as a Convenient Simplification, not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England," Economic Journal, Royal Economic Society, vol. 88(351), pages 549-63, September.
  11. Hendry, D.F. & Richard, J.-F., 1987. "Recent developments in the theory of encompassing," CORE Discussion Papers 1987022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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