COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 718 "The Use of Expected Future Variables in Macroeconometric Models" Ray C. Fair August 1984 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 Zt 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 and prices in their consumption and labor supply
decisions and for the Fed’s response to future inflation rates. The sensitivity of
the policy properties of my macroeconometric model to the more sophisticated hypothesis is
also examined in the paper. The properties are not sensitive for a policy action in which
government expenditures are changed. They are somewhat sensitive for an action in which
personal tax rates are changed. In the latter case the properties are also sensitive to
whether or not the policy action is anticipated. |
