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Econometric Implications of the Rational Expectations Hypothesis
Kenneth F. Wallis
Abstract
The implications for applied econometrics of the assumption that unobservable expectations are formed rationally in Muth's sense are examined. The statistical properties of the resulting models and their distributed lag and time series representations are described. Purely extrapolative forecasts of endogenous variables can be constructed, as alternatives to rational expectations, but are less efficient. Identification and estimation are considered: an order condition is that no more expectations variables than exogenous variables enter the model. Estimation is based on algorithms for nonlinear-in-parameters systems; other approaches are surveyed. Implications for economic policy and econometric policy evaluation are described.
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