Abstract: Under general conditions, linear decision rules of agents with rational
expectations are equivalent to restricted error corrections. However,
empirical rejections of rational expectation restrictions are the rule,
rather than the exception, in macroeconomics. Rejections often are
conditioned on the assumption that agents aim to smooth only the levels
of actions or are subject to geometric random delays. Generalizations of
dynamic frictions on agent activities are suggested that yield closed-form,
higher-order decision rules with improved statistical fits and infrequent
rejections of rational expectations restrictions. Properties of these
generalized ``rational'' error corrections are illustrated for producer
pricing in manufacturing industries.
Keywords: Companion systems, error correction, producer pricing, rational expectations
Full paper (237 KB PDF)
| Full paper (341 KB Postscript)
Home | Economic research and data | FR working papers | FEDS | 1998 FEDS papers
Accessibility
To comment on this site, please fill out our feedback form.
Last update: August 19, 1998
|