Rationality,specification tests,and macroeconomic models

Rational expectation models embody cross-equation restrictions that are implied by the theory of rational expectations. In this paper we illustrate how tests of these restrictions may be implemented in terms of general macroeconomic models by employing the models of Taylor and Sargent as examples. In addition, the more important issue of the proper interpretation of the results of these tests is addressed. We contend that tests for rationality should become part of the model-building process as they are akin to specification tests for models in which rational expectations is treated as the maintained hypothesis. A procedure is suggested when the restriction are inconsistent with data. Special emphasis is placed upon examining how changes in specifications of the model's exogenous variables can influence test results.     

Identification of rational expectations models

This paper deals with the problem of the identification of simultaneous Rational Expectations (RE) models. In the case of RE models with current expectations of the endogenous variables, the necessary and sufficient conditions for the global identification are derived explicitly in terms of the structural parameters and the linear homogenous identifying restrictions. It is shown that in the absence of a priori restrictions on the processes generating the exogenous variables and the disturbances, RE models and general distributed lag models are ‘observationally equivalent’. In the case of RE models with future expectations of the endogenous variables, a general solution that highlights the ‘non-uniqueness’ problem and from which other solutions such as forward or backward solutions can be obtained, is derived. It is shown that untestable and often quite arbitrary restrictions are needed if RE models with future expectations are to be identifiable. Certain order conditions similar to those obtained for the identification of RE models with current expectations are also derived for this case.     

Consistent model specification tests

In this paper we propose two consistent tests for functional form of nonlinear regression models without employing specified alternative models. The null hypothesis is that the regression function equals the conditional expectation function, which is tested against the alternative hypothesis that the null is false. These tests are based on a Fourier transform characterization of conditional expectations.     

Spousal Complementarity in Home Production

A bstract .   Economists have increasingly recognized the growing role of married women in the labor market by treating the labor supply decisions of married couples as joint decisions. However, they have yet to apply the same reasoning to home production. We build a more complete model of household time allocation that consists of a system of simultaneous equations estimating hours of labor supply and home production. Using data on white couples from Wave XXV of the Panel Study of Income Dynamics, we find that working wives act as if their husbands are substitutes for home production while other wives do not. Husbands' responses to their wives' behavior depends upon whether children are present.     

On the Epidemiological Microfoundations of Sticky Information*

We estimate and compare two models in which households periodically update their expectations. The first model assumes that households update their expectations towards survey measures. In the second model, households update their expectations towards rational expectations (RE). While the literature has used these specifications indistinguishably, we argue that there are important differences. The two models imply different updating probabilities, and the data seem to prefer the second one. We then analyse the properties of both models in terms of mean expectations, median expectations, and a measure of disagreement among households. The model with periodical updates towards RE also seems to fit the data better along these dimensions.     

Modelling oil price expectations: Evidence from survey data

Using Consensus Forecast survey data on WTI oil price expectations for 3- and 12-month horizons over the period November 1989 to December 2008, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes fits the data by itself. We suggest a mixed expectation model defined as a linear combination of these traditional processes, which we interpret as the aggregation of individual mixing behavior and of heterogenous groups of agents using these simple processes. This approach is consistent with the economically rational expectations theory. We show that the target oil price included in the regressive component of this model depends on the long-run marginal cost of crude oil production and on short term macroeconomic fundamentals whose effects are subject to structural changes. For the two horizons, estimation results provide evidence for our mixed expectation model incorporating this break-dependent target price.     

The R and D/Marketing interface and single informant bias in NPD research: an illustration of a benchmarking case study

Analysing the performance of new product development (NPD) processes requires the reliable assessment of non-documented organizational characteristics. Based on key informant literature we discuss the difficulties of gaining reliable information from respondents and we identify potential sources for heterogeneous perceptions among different respondents. We assume that NPD research may be subject to response biases, if it is based on sole informants only. We apply an existing benchmarking approach for NPD processes in a comprehensive case study in order to illustrate sources and effects of single informant biases. We find that perceptions differ substantially among the individual respondents. In particular, we observe different functional perceptions between respondents from Marketing and Research and Development. The results are consistent with expectations from interface theory. These perceptual differences have a severe impact on the managerial conclusions drawn from benchmarking. There appears to be no single reliable source of information within an organization. Furthermore, variances among informants' assessments should be recognized and regarded as valuable information. It is our recommendation that multiple informants ought to be included in future NPD research and benchmarking studies.     

Work–family conflict among Chinese married couples: testing spillover and crossover effects

This study simultaneously examined the two mechanisms (i.e. spillover and crossover effects) that link work-to-family conflict and life satisfaction among Chinese married couples. Data were collected from a sample of 123 Chinese managers and their spouses. Work-to-family conflict was measured from two sources: self-reported ratings and spouse-reported ratings. The results provided support for the suggested direct spillover mechanism for both husbands and wives: work-to-family conflict to life satisfaction. In addition, we found that work-to-family conflict crossed over to life satisfaction from wives to husbands but not from husbands to wives. Practical implications and future research directions are discussed.     

The implications of financial frictions and imperfect knowledge in the estimated DSGE model of the U.S. economy

In this paper, I study how alternative assumptions about expectation formation can modify the implications of financial frictions for the real economy. I incorporate a financial accelerator mechanism into a version of the Smets and Wouters (2007) DSGE framework and explore the properties of the model assuming, on the one hand, complete rationality of expectations and, alternatively, several learning algorithms that differ in terms of the information set used by agents to produce the forecasts. I show that the implications of the financial accelerator for the business cycle may vary depending on the approach to modeling the expectations. The results suggest that the learning scheme based on small forecasting functions is able to amplify the effects of financial frictions relative to the model with Rational Expectations. Specifically, I show that the dynamics of real variables under learning is driven to a significant extent by the time variation of agents’ beliefs about financial sector variables. During periods when agents perceive asset prices as being relatively more persistent, financial shocks lead to more pronounced macroeconomic outcomes. The amplification effect rises as financial frictions become more severe. At the same time, a learning specification in which agents use more information to generate predictions produces very different asset price and investment dynamics. In such a framework, learning cannot significantly alter the real effects of financial frictions implied by the Rational Expectations model.     

Experimental evidence on inflation expectation formation

Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40% of subjects. More than 20% of subjects are also best described by adaptive learning models, where they behave like econometricians and update their model estimates every period. However, rather than using a single forecasting model, switching between models describes their behavior better. Switching is more likely to occur when experimental economy is in a recession.     

The empowerment expectation–perception gap: An examination of three alternative models

Previous empowerment research has focused on subordinate perceptions of empowering leadership and its outcomes. Met‐expectations theory suggests that subordinate expectations of leader behaviours are essential in forming their a posteriori evaluations. To address the lack of investigation of individual expectations in the empowerment literature, in this study, we explore how subordinates' empowerment expectations and perceptions combine to influence their job satisfaction and psychological empowerment based on three alternative, theoretically derived met‐expectation models, namely, the disconfirmation model, the ideal‐point model, and the experiences‐only model. The results of a 2‐stage study of 114 respondents indicate that employees are more satisfied with their work when perceived empowerment exceeds expectations. However, both empowerment perceptions and expectations positively contribute to higher psychological empowerment. We then discuss implications and directions for future research.     

家庭联合退休行为研究述评与展望

将老年劳动力的个体退休决策放置在家庭背景下进行而出现的联合退休行为,矫正了因使用单一个体退休模型,而忽略家庭内部互动关系所导致的影响评估偏差,对于全面和正确理解个体退休决策具有重要意义。本文梳理了国外学界有关家庭联合退休行为的主要研究成果,同时将该行为形成的五类影响因素归纳为个体、互动和外部三个层次,并通过替代、收入及互补效应对影响路径进行解释。此外,简要概括了该问题的主要研究方法,并通过性别不对称性及政策实施偏差双视角对影响结果进行了归纳展示。进一步的,对该理论在我国国情下可能出现的内涵延伸及借鉴意义予以阐述。最后,基于已有研究对该问题未来进一步的研究方向提出展望。     

The informativeness of estimation moments

This paper introduces measures for how each moment contributes to the precision of parameter estimates in generalized method of moments settings. For example, one of the measures asks what would happen to the variance of the parameter estimates if a particular moment was dropped from the estimation. The measures are all easy to compute. We illustrate the usefulness of the measures through two simple examples as well as an application to a model of joint retirement planning of couples. We estimate the model using the British Household Panel Survey, and we find evidence of complementarities in leisure. Our sensitivity measures illustrate that the estimate of the complementarity is primarily informed by the distribution of differences in planned retirement dates. The estimated econometric model can be interpreted as a bivariate ordered-choice model that allows for simultaneity. This makes the model potentially useful in other applications.     

Rational expectations equilibrium and the strategic choice of costly information

This paper studies costly information acquisition in one-good production economies when agents acquire private information and prices transmit information. Before asset markets open, agents choose the quality of their private information. After this information stage, agents trade assets in sequentially complete markets taking into account their private information and the information revealed by equilibrium prices (rational expectations equilibrium, (Radner, R., 1979. Rational expectations equilibrium: generic existence and the information revealed by prices, Econometrica 47, 655–678.)). An overall equilibrium in asset and information market is defined as a Nash equilibrium of the information game in which agents’ actions are information choices and their utility payoffs are the ex-ante expected utilities of the corresponding rationale expectations equilibrium. This paper shows that for a generic set of economies parameterized by endowments and productivity shocks, an overall equilibrium in information and asset market (a Nash equilibrium of the induced information game) with costly information acquisition and fully-revealing prices exists. In other words, informational efficiency is in general consistent with costly information acquisition.     

The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment

In this paper, we present the results of a Learning-to-Forecast Experiment (LtFE) where we eliciting short- as well as long-run expectations regarding the future price dynamics in markets with positive and negative expectations feedback. Comparing our results on short-run expectations with the LtFE literature, we prove that eliciting long-run expectations has no impact on the price dynamics nor on short-run expectations formation. In particular, we confirm that the Rational Expectation Equilibrium (REE) is a good benchmark only for the markets with negative feedback. Interestingly, our data show that while the term structure of the cross-sectional dispersion of expectations is convex in positive feedback markets, it is concave in negative feedback markets. Differences in the slope of the term structure stem from diverse degrees of uncertainty regarding the evolution of prices in the two feedback systems: (1) in the negative feedback system, the convergence of the price to the REE reflects a tendency for coordination of long-run expectations around the fundamental value; (2) conversely, oscillatory price dynamics observed in the positive feedback system is responsible for the diverging pattern of long-run expectations. Finally, we propose a new measure of heterogeneity of expectations based on the scaling of the dispersion of expectations over the forecasting horizon.

     

The house price determination process: Rational expectations with a spatial context

Applying the rational expectations hypothesis, this essay models the current value of a house as the conditional expectation of the discounted stream of housing services accruing to the owner of the house. The value of housing services is determined by neighborhood effects as well as the physical attributes of the property itself. In the existing hedonic literature, future transactions have not been utilized to describe neighborhood effects. The rational expectations asset pricing model in this study accounts for expected future neighborhood effects as well as observed current neighborhood effects. The reduced form of the rational expectations model is a spatial autoregressive (SAR) model with two spatial lags. After employing the generalized method of moments (GMM) in estimating the spatial asset pricing model, I find that both expected future transactions and prior transactions in the neighborhood are significant. The inclusion of expected future transaction prices in the neighborhood takes into account the influence of expected changes in the community and factors these potential changes into the current house price. This is consistent with forward-looking households. The forward-looking model generates superior out-of-sample prediction performance relative to both the conventional hedonic model without considering neighborhood effects or the standard spatial hedonic model including only past transactions.     

An Econometric Analysis of Polish Inflation Dynamics with Learning about Rational Expectations

Rational expectations modelling has been criticized for assuming that economic agents can learn quickly about and compute rational price expectations. In response, various authors have studied theoretical models in which economic agents use adaptive statistical rules to develop price expectations. A goal of this literature has been to compare resulting learning equilibria with rational expectations equilibria. The lack of empirical analysis in this literature suggests that adaptive learning makes otherwise linear dynamic models nonlinearly intractable for current econometric technology. In response to the lack of empirical work in this literature, this paper applies to post-1989 monthly data for Poland a new method for modelling learning about price expectations. The key idea of the method is to modify Cagan’s backward-looking adaptive-expectations hypothesis about the way expectations are actually updated to a forward-looking characterization which instead specifies the result of learning. It says that, whatever the details of how learning actually takes places, price expectations are expected to converge geometrically to rationality. The method is tractable because it involves linear dynamics. The paper contributes substantively by analyzing the recent Polish inflation, theoretically by characterizing learning, and econometrically by using learning as a restriction for identifying (i.e., estimating wth finite variance) unobserved price expectations with the Kalman filter. This revised version was published online in July 2006 with corrections to the Cover Date.     

In Search of Late Career: A Review of Contemporary Social Science Research Applicable to the Understanding of Late Career

Concerns expressed in the mid-1990s about the lack of research on late career are no longer valid. There is a growing body of research; however, it is scattered across a range of disciplines. In an effort to gather current thinking on late career, this review draws upon work addressing chronological aging, labor economics, sociology and social psychology, retirement research, human resource management, and career theory. Several cross-disciplinary observations were made: (1) Cognitive declines with age are not sufficient to impact work performance; (2) Current economic models assume declining productivity among older workers, but this reflects perceptions rather than reality; (3) Aging may be better understood as a series of discrete transformations rather than as a continuous process of decline; (4) A productive use of older workers recognizes individuals' specific strengths and the increasingly distinctive individual differences among older workers.     

Predictions of short-term rates and the expectations hypothesis

This paper emphasizes that traditional tests of the EH are based on two assumptions: the expectations hypothesis (EH) per se and an assumption about the expectations generating process (EGP) for the short-term rate. Arguing that conventional tests of the EH need to assume EGPs that may be significantly at odds with the true EGP, we investigate this possibility by analyzing the out-of-sample predictive performances of several models for predicting interest rates, including a few models which assume that the EH holds in its functional form that relates long- to short-term yields. Using US riskless yield data for a 1970–2016 monthly sample and testing methods that take into account the parameter uncertainty, the null hypothesis of an equal predictive accuracy of each model relative to the random walk alternative is hardly ever rejected at intermediate and long horizons. This confirms that, at least at a practical level, the main difficulty with the EH is represented by the effective prediction of short-term rates. We discuss the relevance of these findings for central banks’ use of forward guidance.     

Bayesian analysis of a dynamic stochastic model of labor supply and saving

This paper empirically implements a dynamic, stochastic model of life-cycle labor supply and human capital investment. The model allows agents to be forward looking. But, in contrast to prior literature in this area, it does not require that expectations be formed “rationally”. By avoiding strong assumptions about expectations, I avoid sources of bias stemming from misspecification of the expectation process. A Bayesian econometric method based on Geweke and Keane (in: R.S. Mariano, T. Schuermann, M. Weeks (Eds.), Simulation Based Inference and Econometrics: Methods and Applications, Cambridge University Press, Cambridge, 1999) is used to relax assumptions over expectations. The results of this study are consistent with findings from previous research in the labor supply literature that makes the rational expectations assumption.