Expectation formation: Criteria and an assessment

Summary This paper presents three requirements which hypotheses on expectation formation should meet. These three criteria refer to the data used, to the learning process and to the identification of structural parameters. In the second part of the paper these criteria are used for assessing various expectation hypotheses and estimation procedures of models incorporating expectational variables. The analysis reveals that only weak forms of the rational expectation hypothesis and some proxy variable methods with time-varying parameters meet all three criteria.This research forms part of the author's dissertation and of the project Exchange-rate and Monetary Policy in International Dependence. Preliminary versions of this paper were presented at seminars at the University of Amsterdam and the University of Groningen and at the European Meeting of the Econometric Society, Copenhagen, August 24–28, 1987. Comments and suggestions by seminar participants, especially Willem H. Buiter, by members of the above-mentioned project and by an anonymous referee are gratefully acknowledged. The usual disclaimer applies.