Social and Behavioral Sciences Commons^™

The Use Of Expected Future Variables In Macroeconometric Models, Ray C. Fair

Cowles Foundation Discussion Papers

A more sophisticated expectational hypothesis than is traditionally used in the specification of macroeconometric models is tested in this paper. Economic agents are assumed to use a vector of variables Z t in forming their expectations for periods t + 1 and beyond. These expectations may or may not be rational in the Muth sense. The results provide some evidence in favor of the more sophisticated hypothesis, but they are not strong enough to allow much weight to be put on the hypothesis as yet. The evidence in favor of the hypothesis is strongest for households’ response to future wages …