Measurement Errors and Tests for Rationality

Jinook Jeong and G S Maddala

Journal of Business & Economic Statistics, 1991, vol. 9, issue 4, 431-39

Abstract: The traditional tests for rationality have often rejected the hypothesis of rationality for survey data on expectations. It has been argued that, in the presence of unit roots, cointegration tests should be applied. The cointegration tests have often failed to reject the hypothesis of rationality. The present paper argues that errors in variables affect tests of rationality. The authors use multiple sources of expectations to correct for the errors-in-variables bias but find that the hypothesis of rationality is rejected even after this correction. This paper uses survey data on interest rates, stock prices, and exchange rates.

Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:bes:jnlbes:v:9:y:1991:i:4:p:431-39

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