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Comparing behavioural and rational expectations for the US post-war economy

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Abstract

The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full re-estimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2012/21.

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Length: 19 pages
Date of creation: Aug 2012
Handle: RePEc:cdf:wpaper:2012/21
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Keywords: behavioural expectation; rational expectation; bank crisis; indirect inference;

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Find related papers by JEL classification:
  • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
  • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
  • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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Cited by:

  1. Miah, Fazlul & Khalifa, Ahmed Ali & Hammoudeh, Shawkat, 2016. "Further evidence on the rationality of interest rate expectations: A comprehensive study of developed and emerging economies," Economic Modelling, Elsevier, vol. 54(C), pages 574-590.
  2. Fan, Jingwen & Minford, Patrick & Ou, Zhirong, 2016. "The role of fiscal policy in Britain's Great Inflation," Economic Modelling, Elsevier, vol. 58(C), pages 203-218.
  3. Liu, Chunping & Minford, Patrick, 2014. "How important is the credit channel? An empirical study of the US banking crisis," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 119-134.
  4. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2016. "A note on news about the future: the impact on DSGE models and their VAR representation," Cardiff Economics Working Papers E2016/11, Cardiff University, Cardiff Business School, Economics Section.
  5. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2015. "Small sample performance of indirect inference on DSGE models," Cardiff Economics Working Papers E2015/2, Cardiff University, Cardiff Business School, Economics Section.
  6. Michael Hatcher & Patrick Minford, 2016. "Stabilisation Policy, Rational Expectations And Price-Level Versus Inflation Targeting: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 327-355, 04.
  7. Vo Phuong Mai Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
  8. Xu, Yingying & Chang, Hsu-Ling & Lobonţ, Oana-Ramona & Su, Chi-Wei, 2016. "Modeling heterogeneous inflation expectations: empirical evidence from demographic data?," Economic Modelling, Elsevier, vol. 57(C), pages 153-163.
  9. Hatcher, Michael & Minford, Patrick, 2014. "Stabilization policy, rational expectations and price-level versus infl‡ation targeting: a survey," CEPR Discussion Papers 9820, C.E.P.R. Discussion Papers.

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