Implementation of the Logit Model to the Hypothesis for Rational Expectations

Petja Ivanova and Dejan Lazarov

Economic Thought journal, 2001, issue 3, 46-58

Abstract: The article shows the possibility for implementing the Logit method as an alternative approach, which allows avoiding a great part of the difficulties connected with the construction and estimation of the models with rational expectations. The idea is to use the Logit method for estimating “the degree of adequacy” of the public in respect of the inflation behaviour in Bulgaria during the period 1993-2000. In the model, expectations are defined as rational, when the subjective probabilities of the economic agents compared to the full set of possible results, are really reflecting the objective conditional mathematical probabilities, based on the available information at a defined moment. By specifying a variable of reliability and by comparing its dynamics with the one of inflation, the Logit method allows to test the validity of the hypothesis for rational expectations by means of the principle of correlation. Furthermore the model of inflation and its interaction with the individual solutions is not estimated directly but this is done in respect of the effect of this interaction. The results obtained allow to make conclusions in respect of the structure of the information basis and the process of “training” when forming rational expectations.

JEL-codes: E1 E27 E31 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:bas:econth:y:2001:i:3:p:46-58

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