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Testing the Rational Expectations Hypothesis using Survey Data

Author

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  • Carl S Bonham

    (Department of Economics, University of Hawaii at Manoa)

  • Richard H Cohen

Abstract

Because of the importance of inflation expectations, Lloyd B. Thomas Jr. (Fall 1999, p. 125-44) reexamines "the evidence on the nature and performance of various measures of expected inflation, with special attention given to the issue of rationality" (p. 126). Thomas tests the unbiasedness hypothesis using the Livingston and Michigan survey forecasts for the 1960 to 1997 time period and is unable to reject the null hypothesis of unbiasedness. Unfortunately, two types of problems due to aggregation plague such tests: private information bias and micro-heterogeneity bias. Therefore, for these survey forecasts, consensus regressions should generally not be used to test rationality; rationality can only be tested at the individual level.

Suggested Citation

  • Carl S Bonham & Richard H Cohen, 2000. "Testing the Rational Expectations Hypothesis using Survey Data," Working Papers 200007, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:200007
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/007.pdf
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    References listed on IDEAS

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    1. Victor Zarnowitz & Phillip Braun, 1993. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Chapters, in: Business Cycles, Indicators, and Forecasting, pages 11-94, National Bureau of Economic Research, Inc.
    2. Batchelor, Roy & Dua, Pami, 1991. "Blue Chip Rationality Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 692-705, November.
    3. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-735, September.
    4. James H. Stock & Mark W. Watson, 1993. "Business Cycles, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number stoc93-1.
    5. Stock, James H. & Watson, Mark W. (ed.), 1993. "Business Cycles, Indicators, and Forecasting," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226774886.
    6. Lloyd B. Thomas, 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall.
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    Cited by:

    1. Lui, Silvia & Mitchell, James & Weale, Martin, 2011. "The utility of expectational data: Firm-level evidence using matched qualitative-quantitative UK surveys," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1128-1146, October.
    2. Paul Frijters & John P. Haisken-DeNew & Michael Shields, 2003. "How Well Do Individuals Predict Their Future Life Satisfaction? Rationality and Learning Following a Nationwide Exogenous Shock," CEPR Discussion Papers 468, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    3. Ivana Komunjer & Michael T. Owyang, 2012. "Multivariate Forecast Evaluation and Rationality Testing," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1066-1080, November.
    4. Antonello D’Agostino & Kieran Mcquinn & Karl Whelan, 2012. "Are Some Forecasters Really Better Than Others?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 715-732, June.
    5. James Yetman & Gregor W. Smith, 2007. "The Curse Of Irving Fisher (professional Forecasters' Version)," Working Paper 1144, Economics Department, Queen's University.
    6. Herzer, Dierk, 2014. "Unions and income inequality: a heterogenous cointegration and causality analysis," Working Paper 146/2014, Helmut Schmidt University, Hamburg.
    7. Carl Bonham & Richard Cohen & Shigeyuki Abe, 2006. "The Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination," Working Papers 200611, University of Hawaii at Manoa, Department of Economics.
    8. Krenz, Astrid, 2016. "Do political institutions influence international trade? Measurement of institutions and the Long-Run effects," University of Göttingen Working Papers in Economics 276, University of Goettingen, Department of Economics.
    9. Smith, Gregor W., 2009. "Pooling forecasts in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1858-1866, November.
    10. Chetan, Dave, 2004. "Are Investment Expectations Rational?," Analytical Studies Branch Research Paper Series 2004208e, Statistics Canada, Analytical Studies Branch.
    11. Lui, Silvia & Mitchell, James & Weale, Martin, 2011. "The utility of expectational data: Firm-level evidence using matched qualitative-quantitative UK surveys," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1128-1146, October.
    12. Frijters, Paul & de New, John & Shields, Michael A., 2002. "Individual Rationality and Learning: Welfare Expectations in East Germany Post-Reunification," IZA Discussion Papers 498, Institute of Labor Economics (IZA).
    13. Yu, Ge, 2003. "Comparing Expectations and Outcomes: Application to UK Data," MPRA Paper 502, University Library of Munich, Germany, revised 2005.
    14. Mr. Christopher W. Crowe, 2010. "Consensus Forecasts and Inefficient Information Aggregation," IMF Working Papers 2010/178, International Monetary Fund.

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