Rational Error Correction

34 Pages Posted: 18 Sep 1998

See all articles by Peter A. Tinsley

Peter A. Tinsley

George Washington University; Birkbeck College, Univ. of London

Date Written: July 22, 1998

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.

JEL Classification: C5, E3

Suggested Citation

Tinsley, Peter A., Rational Error Correction (July 22, 1998). Available at SSRN: https://ssrn.com/abstract=120648 or http://dx.doi.org/10.2139/ssrn.120648

Peter A. Tinsley (Contact Author)

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States

Birkbeck College, Univ. of London

Malet Street
London, WC1E 7HX
United Kingdom

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