Discriminating Rational Expectations Models with Non-Nested Hypothesis Testing: An Application to the Beef Industry

Price expectations are an integral part of agricultural decision making. Despite recognition of this fact, few changes have been made during the past two decades in the way price expectations appear in agricultural models. For example, the majority of existing supply response studies has assumed that price expectations are formed adaptively. The popular adaptive expectations hypothesis is, however, inadequate from an economic perspective. The inadequacy arises not because the adaptive expectations imply that the forecast of a particular variable is a distributed lag of its own past values, but because it implies that the distributed lag parameters are restricted in an ad hoc way. This is so because the parameter restrictions in the distributed lag are not the result of an optimization process.