Testing rational expectations by the use of overidentifying restrictions |
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Authors: | Richard Startz |
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Affiliation: | The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, USA |
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Abstract: | A simple econometric test for rational expectations in the case in which unobservable, rationally expected variables appear in a structural equation is presented. Using McCallum's instrumental variable estimator as a base, a test for rational expectations per se and a joint test of rational expectations and hypotheses about the structural equation are presented. The new test is shown to be a new interpretation of Basmann's test of overidentifying restrictions. As an illustration, the hypothesis that the forward exchange rate is the rationally expected future spot exchange rate is tested and rejected. |
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