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The Effect of Error-Correction on Testing the Rational-Expectations Neutrality Hypothesis

Author

Listed:
  • Luigi Ermini
  • Dongkoo Chang

Abstract

By adopting a VAR framework in first differences, recent literature has confirmed previous results in testing the macro rational-expectations hypotheses of rationality and neutrality: rationality is corroborated, neutrality is rejected. However, this paper shows that, by correctly incorporating a long-run cointegrating relationship between money, output and interest rate in the form of an error-correction term, the test results are reversed, in that neutrality is no longer rejected.

Suggested Citation

  • Luigi Ermini & Dongkoo Chang, 1993. "The Effect of Error-Correction on Testing the Rational-Expectations Neutrality Hypothesis," Working Papers 199305, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:199305
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/88-98/WP_93-5.pdf
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    Cited by:

    1. Ermini, Luigi & Chang, Dongkoo, 1996. "Testing the joint hypothesis of rationality and neutrality under seasonal cointegration: The case of Korea," Journal of Econometrics, Elsevier, vol. 74(2), pages 363-386, October.

    More about this item

    Keywords

    rationality; neutrality; error-correction;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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