Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models

While the theoretical motivation behind dynamic macroeconomic models that incorporate rational expectations and optimizing foundations is sound, the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior are often seriously at odds with the data....

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Bibliographic Details
Published in:The American economic review 2002-09, Vol.92 (4), p.1013-1028
Main Authors: Estrella, Arturo, Fuhrer, Jeffrey C.
Format: Article
Language:English
Subjects:
Autocorrelation
Consumption
Contrafactuals
Economic models
Economic theory
Inflation
Inflation rates
Interest rates
Macroeconomic modeling
Macroeconomics
Modeling
Monetary policy
Output gaps
Parametric models
Phillips curve
Prices
Rational expectations
Regression analysis
Shorter Papers
Studies
Variables
Vector autoregression
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Summary:While the theoretical motivation behind dynamic macroeconomic models that incorporate rational expectations and optimizing foundations is sound, the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior are often seriously at odds with the data. In models that are intended for use in monetary policy analysis, these dynamic shortcomings should be considered quite serious. Some empirical evidence of the counterfactual dynamic implications of the class of rational-expectations models is presented, and a simple feature common to many dynamic specifications for prices and real variables are identified to which the cause of the empirical problems may be traced. Simple changes in the dating of variables or expectations will not change the basic properties of the models. On the positive side, however, alternative specifications are suggested that do not exhibit the counterfactual dynamics that are emphasized.
ISSN:0002-8282
1944-7981
DOI:10.1257/00028280260344579