Working Paper: CEPR ID: DP9132
Authors: Chunping Liu; Patrick Minford
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 Codes: E17; E37; E47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| behavioral expectations model specifications (C51) | inability to accurately predict macroeconomic outcomes (D89) |
| rational expectations model (D84) | predictive success regarding economic behavior (D91) |
| indirect inference procedure (C51) | failure of behavioral model to account for U.S. business cycle behavior (E32) |
| behavioral model (D91) | failure to meet expected bounds of statistical significance (C46) |
| Wald statistic (C29) | quantification of model fit to actual data (C52) |