Rationalizing Rational Expectations? Tests and Deviations

Arbeitspapier

In this paper, we build a new test of rational expectations based on the marginal distributions of realizations and subjective beliefs. This test is widely applicable, including in the common situation where realizations and beliefs are observed in two different datasets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribution of realizations being a mean-preserving spread of the distribution of beliefs. The null hypothesis can then be rewritten as a system of many moment inequality and equality constraints, for which tests have been recently developed in the literature. Next, we go beyond testing by defining and estimating the minimal deviations from rational expectations that can be rationalized by the data. In the context of structural models, we build on this concept to propose an easy-to-implement way to conduct a sensitivity analysis on the assumed form of expectations. Finally, we apply our framework to test for and quantify deviations from rational expectations about future earnings, and examine the consequences of such departures in the context of a life-cycle model of consumption.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 11989

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Intertemporal Household Choice; Life Cycle Models and Saving ; Expectations; Speculations
• Subject: rational expectations ; test ; data combination ; subjective expectations ; sensitivity analysis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): D'Haultfœuille, Xavier ; Gaillac, Christophe ; Maurel, Arnaud
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/193283
• Last update: 10.03.2025, 11:44 AM CET