Working Papers

1984

 

October 1984, No. 84-7

Inadequate Tests of the Rationality of Expectations

Roy H. Webb

In several recent articles, authors have regressed actual values of macroeconomic aggregates on predicted values and claimed that they were testing the rationality of expectations. This paper interprets those regressions as testing a joint hypothesis of imperfect information and rational expectations. An empirical method is proposed to separate the components of the joint hypothesis. Predictions from two major forecasting services are examined, and results are found that are consistent with rational expectations but inconsistent with the joint hypothesis. It is therefore argued that many purported tests of rational expectations are inadequate.



Our Research Focus: Inflation & Monetary Policy

Topics: Monetary Policy
Contact Us

Richmond

Lisa Kenney
(804) 697-8179