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Rational Expectations and the Defris‐Williams Inflationary Expectations Series

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  • JOCELYN HORNE

Abstract

This paper evaluates the Defris‐Williams inflationary expectations series as a measure of rational expectations for the period 1973(1) to 1980(2). The results show that the series violates the rationality criterion, being an inefficient and biased predictor of inflation. By constructing an ‘information‐augmented’ D‐W series, the quantitative importance of omitted information available to consumers at the time of making their forecasts is isolated. The key omitted economic variables are found to be lagged monetary growth and unemployment or an indexation dummy which explains 70 percent of the forecast error of the D‐W series. These results suggest that a theoretically constructed expectations series may prove to be a superior measure of market expectations of inflation in Australia.

Suggested Citation

  • Jocelyn Horne, 1981. "Rational Expectations and the Defris‐Williams Inflationary Expectations Series," The Economic Record, The Economic Society of Australia, vol. 57(3), pages 261-268, September.
    • Handle: RePEc:bla:ecorec:v:57:y:1981:i:3:p:261-268
    DOI: 10.1111/j.1475-4932.1981.tb01060.x
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    References listed on IDEAS

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    1. Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-355, December.
    2. repec:bla:ecorec:v:53:y:1977:i:142&143:p:390-404 is not listed on IDEAS
    3. Pesando, James E, 1975. "A Note on the Rationality of the Livingston Price Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 849-858, August.
    4. repec:bla:ecorec:v:49:y:1973:i:125:p:50-61 is not listed on IDEAS
    5. L. V. Defris & R. A. Williams, 1979. "The Formation of Consumer Inflationary Expectations in Australia," The Economic Record, The Economic Society of Australia, vol. 55(2), pages 136-148, June.
    6. Shiller, Robert J., 1978. "Rational expectations and the dynamic structure of macroeconomic models : A critical review," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 1-44, January.
    7. T. J. Valentine, 1977. "Price Expectations in Australia: An Alternative Analysis," The Economic Record, The Economic Society of Australia, vol. 53(3), pages 390-404, September.
    8. Pearce, Douglas K, 1979. "Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 447-456, November.
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    11. repec:bla:ecorec:v:55:y:1979:i:149:p:136-48 is not listed on IDEAS
    12. P. D. Jonson & D. M. Mahoney, 1973. "Price Expectations in Australia," The Economic Record, The Economic Society of Australia, vol. 49(1), pages 50-61, March.
    13. Danes, Michael, 1975. "The Measurement and Explanation of Inflationary Expectations in Australia," Australian Economic Papers, Wiley Blackwell, vol. 14(24), pages 75-87, June.
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    Cited by:

    1. Peter Saunders, 1983. "Rational Expectations and the Deft is‐Williams Inflationary Expectations Series: A Comment," The Economic Record, The Economic Society of Australia, vol. 59(3), pages 290-292, September.
    2. Ken Holden & John Thompson, 1997. "Combining forecasts, encompassing and the properties of UK macroeconomic forecasts," Applied Economics, Taylor & Francis Journals, vol. 29(11), pages 1447-1458.
    3. Jocelyn Horne, 1983. "Rational Expectations and the Defris‐Williams Inflationary Expectations Series: A Reply," The Economic Record, The Economic Society of Australia, vol. 59(3), pages 293-294, September.
    4. Silva Lopes, Artur, 1994. "A "hipótese das expectativas racionais": teoria e realidade (uma visita guiada à literatura até 1992) [The "rational expectations hypothesis": theory and reality (a guided tour ," MPRA Paper 9699, University Library of Munich, Germany, revised 23 Jul 2008.

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