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Rational expectations forecasts from nonrational models

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  • Paul A. Anderson

Abstract

This paper puts forward a method of policy simulation with an existing macroeconometric model under the maintained assumption that individuals form their expectations rationally. This new simulation technique grows out of Lucas? criticism that standard econometric policy evaluation permits policy rules to change but doesn?t allow expectations mechanisms to respond as economic theory predicts they will. The technique is applied to versions of the St. Louis Federal Reserve model and the Federal Reserve-MIT-Penn (FMP) model to simulate the effects of different constant money growth policies. The results of these simulations indicate that the problem identified by Lucas may be of great quantitative importance in the econometric analysis of policy alternatives.

Suggested Citation

  • Paul A. Anderson, 1978. "Rational expectations forecasts from nonrational models," Staff Report 19, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:19
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    References listed on IDEAS

    as
    1. Fair, Ray C, 1979. "An Analysis of a Macro-Econometric Model with Rational Expectations in the Bond and Stock Markets," American Economic Review, American Economic Association, vol. 69(4), pages 539-552, September.
    2. Sargent, Thomas J, 1972. "Rational Expectations and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(1), pages 74-97, Part I Fe.
    3. Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
    4. Leonall C. Andersen & Keith M. Carlson, 1986. "A monetarist model for economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Oct, pages 45-66.
    5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    6. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
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