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Title: Comparing behavioural and rational expectations for the US post-war economy

Author(s): Chunping Liu and Patrick Minford

Publication Date: September 2012

Keyword(s): bank crisis, behavioural expectations, indirect inference and rational expectations

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Liu, C and Minford, P. 2012. 'Comparing behavioural and rational expectations for the US post-war economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9132