Inferential Expectations

Gordon Menzies and Daniel Zizzo

No 159, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Rational expectations are shown to be a special (limiting) case of inferential expectations, with the test size a becoming a metric for rationality. When inferential expectations are built into a Dornbusch-style model of the exchange rate, regression tests of Uncovered Interest Parity and the rational expectations version of the term structure both display downward bias in the slope coefficient. We present the results of an experiment that supports inferential expectations.

Keywords: expectations; macroeconomics; rationality; uncovered interest parity; term structure; exchange rate (search for similar items in EconPapers)
JEL-codes: C91 D84 E50 F31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2005-05-01
New Economics Papers: this item is included in nep-exp, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as: Menzies, G. and Zizzo, J., 2009, "Inferential Expectations", The B.E. Journal of Macroeconomics, 9(1), 1-27.

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https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp159.pdf (application/pdf)

Related works:
Journal Article: Inferential Expectations (2009)
Working Paper: INFERENTIAL EXPECTATIONS (2005)
Working Paper: Inferential Expectations (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:159

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