The unbiasedness and efficiency tests of the rational expectations hypothesis

Bilgili, Faik (2001): The unbiasedness and efficiency tests of the rational expectations hypothesis.

Abstract

This study examines the direct tests of the Rational Expectations Hypothesis (REH). Pesando (1975) employs the Livingston survey data of business economists and reaches the rejection of rationality and consistency but not rejection of the efficiency. Analyzing the same data, Carlson (1977) rejects these three hypotheses that Pesando tests when he uses expectations on CPI, but doesn’t reject hypotheses as he uses expectations on WPI. Turnovsky (1980) tests the unbiasedness property of the REH using Livingston data and finds different results for the different periods of data. Friedman (1980) applies the unbiasedness and efficiency tests using data of The Goldsmith-Nagan Bond and Money Market Letter and reaches mixed results for the REH. Ball and Croushore (1995) use the several survey results and univariate forecasting models. Their results provide a strong rejection of the REH.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational expectations hypothesis, expectations, unbiasedness, efficiency, Box-Jenkins forecasting model
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

Ball, L., and D. Croushere. “Expectations and the Effects of Monetary Policy.” NBER Working Paper Series, Working Paper 5344, November 1995.

Carlson, John, A. “A Study of Price Forecasts.” Annals of Economic and Social Measurement, 6/1, 1977: 27-56.

Dengiz, B. and C. Özcan. “İkitisadi Yönelim Anketi’nin Geçerliliğinin İncelenmesi Üzerine Bir Çalışma” Ekonomiyi İzleme ve İstatistik Çalışması, The Central Bank of The Republic of Turkey, 1994: 183-191.

Figlewski, S., and P.Watchel. “The Formation of Inflationary Expectations.” The Review of Economics and Statistics, vol. 58, no. 1, February 1981: 1-10.

Friedman, Benjamin, M. “Survey Evidence on the ‘Rationality’ of Interest Rate Expectations.” Journal of Monetary Economics 6, 1980: 453-465.

Gosh, Sukesh, K. Econometrics, Theory and Applications, Prentice Hall, Englewood Cliffs, New Jersey, 1991.

Pearce, Douglas, K. “Comparing Survey and Rational Measures of Expected Inflation.” Journal of Money, Credit and Banking, vol. 11, no. 4, November 1979: 447-456.

Pesando, E., James. “A Note on the Rationality of The Livingston Price Expectations.” Journal of Political Economy, vol.83, no.4, 1975: 849-857.

Sheffrin, Steven, M. Rational Expectations, Cambridge Surveys of Economic Literature, Cambridge University Press, Cambridge, 1992.

VanderHoff, James. “Direct Evidence on Endogenous Expectation Formation Methods.” Quarterly Review of Economics and Business, vol. 28, no. 3, Autumn 1988: 6-14.