Comparing Behavioural and Rational Expectations for the US Post-War Economy

21 Pages Posted: 28 Sep 2012

See all articles by Chunping Liu

Chunping Liu

affiliation not provided to SSRN

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Date Written: September 2012

Abstract

The banking crisis has caused a resurgence of interest in behavioural models of expectations in macroeconomics. Here we evaluate behavioural and rational expectations econometrically in a New Keynesian framework, using US post-war data and the method of indirect inference. We find that after full reestimation the model with behavioural expectations is strongly rejected by the data, whereas the standard rational expectations version passes the tests by a substantial margin.

Keywords: bank crisis, behavioural expectations, indirect inference, rational expectations

JEL Classification: E17, E37, E47

Suggested Citation

Liu, Chunping and Minford, Patrick, Comparing Behavioural and Rational Expectations for the US Post-War Economy (September 2012). CEPR Discussion Paper No. DP9132. Available at SSRN: https://ssrn.com/abstract=2153573

Chunping Liu (Contact Author)

affiliation not provided to SSRN ( email )

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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