DP9132 | Comparing behavioural and rational expectations for the US post-war economy

Publication Date

16/09/2012

JEL Code(s)

Keyword(s)

Programme Area(s)

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.