Granger Causality, Rational Expectations and Aversion to Unemployment and Inflation

John Hudson

Public Choice, 1994, vol. 80, issue 1-2, 9-21

Abstract: This paper presents a new test for rational expectations. This is done within the context of public concern, or aversion, over inflation and unemployment. It is found that inflation aversion Granger causes inflation but unemployment aversion does not Granger cause unemployment. This implies both that inflation aversion is partially determined by expected inflation and that such expectations have a rational element. However, rational expectations of unemployment do not determine unemployment aversion. The consequences of these results for political business cycle theory are then examined. Copyright 1994 by Kluwer Academic Publishers

Date: 1994
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