First, the efficiency test was applied to both data sets by regressing expectational errors on past actual inflation rates (two or three lags).
According to the time series properties of expectational errors, rationality does not receive support.
Evans and Honkapohja (2003b) label this finding "deeply worrying," and, indeed, the analysis shows the dangers of proceeding naively from the objective (14) to an implementable policy without considering the effects of that policy on the nature of equilibrium or the stability of the equilibrium in the face of small expectational errors.
This alternative representation of the optimal policy rule is successful in generating determinacy and learnability because it does not assume the private sector has rational expectations, instead allowing the central bank to react to small expectational errors.
Combining the expectational IS schedule (11), the Phillips curve (5), and the Fisher equation (6), we obtain
In this section, building on the prior analyses of Parkin (1978) and McCallum (1981), we study the effects of appending a "nominal anchor" to the model of the previous section, which was comprised of the expectational IS specification, the Phillips curve, and the Fisher equation.
Exhibit 4 shows that there is a significant positive link between expectational required returns and beta.
In particular, the intercept is higher than a proxy for the risk-free rate over the sample period and the coefficient of beta is well below estimates of a market risk premium obtained from either expectational (Exhibit 2) or historical data (Exhibit 3).
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From an expectational
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Regular readers of this space know that we employ an Expectational
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This combination is known as Expectational
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The key to a bullish posture using Expectational
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