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A Comparison of the Rational Expectations and the General-to-Specific Approaches to Modelling the Demand for M1

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  • Cuthbertson, Keith
  • Taylor, Mark P

Abstract

The issues involved in assessing the relative performance of forward-looking (rational expectations) models and backward-looking error correction models based on the general-to-specific methodology are examined. Using the demand for M1 in the United Kingdom as a specific example, the authors find that both the error correction model and the forward model perform adequately, although a version of the error correction model does encompass the forward model in a nonnested test. The authors discuss reasons why the discrimination between the two models may prove difficult in practical situations using finite data sets. Copyright 1992 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Cuthbertson, Keith & Taylor, Mark P, 1992. "A Comparison of the Rational Expectations and the General-to-Specific Approaches to Modelling the Demand for M1," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(1), pages 1-22, March.
    • Handle: RePEc:bla:manch2:v:60:y:1992:i:1:p:1-22
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    Cited by:

    1. Ingvild Svendsen, 1998. "Rational Expectations in Price Setting. Tests Based on Norwegian Export Prices," Discussion Papers 226, Statistics Norway, Research Department.
    2. Murray, Jonathan & Sarantis, Nicholas, 1999. "Quality, user cost, forward-looking behavior, and the demand for cars in the UK," Journal of Economics and Business, Elsevier, vol. 51(3), pages 237-258, May.
    3. Parise, Gerald F., 1994. "Permanent income hypothesis and the cost of adjustment," ISU General Staff Papers 1994010108000012303, Iowa State University, Department of Economics.
    4. Mizen, Paul, 1996. "Modeling the demand for money in the industrial and commercial companies sector in the United Kingdom," Journal of Policy Modeling, Elsevier, vol. 18(4), pages 445-467, August.
    5. Engsted, Tom & Haldrup, Niels, 1997. "Money demand, adjustment costs, and forward-looking behavior," Journal of Policy Modeling, Elsevier, vol. 19(2), pages 153-173, April.

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