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A NOTE ON MUTH'S RATIONAL EXPECTATIONS HYPOTHESIS: A TIME-VARYING COEFFICIENT INTERPRETATION

Published online by Cambridge University Press:  25 April 2006

P.A.V.B. SWAMY
Affiliation:
Bureau of Labor Statistics, U.S. Department of Labor
GEORGE S. TAVLAS
Affiliation:
Economic Research Department, Bank of Greece

Abstract

Under certain interpretations of its coefficients, a specified econometric model is an exact representation of the “true” model, defining the “objective” probability distribution. This note enumerates these interpretations. In the absence of the conditions implied by these interpretations, the econometric model is misspecified. The note shows that model misspecifications prevent the satisfaction of a necessary and sufficient condition for individual expectations to be rational in Muth's sense. Whereas restrictive forms of econometric models can give very inaccurate predictions, this note describes the conditions under which the predictions generated from time-varying coefficient models coincide with the predictions generated from the relevant economic theory.

Type
NOTES
Copyright
© 2006 Cambridge University Press

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