The Effect of Error-Correction on Testing the Rational-Expectations Neutrality Hypothesis

Luigi Ermini and Dongkoo Chang

No 199305, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: By adopting a VAR framework in first differences, recent literature has confirmed previous results in testing the macro rational-expectations hypotheses of rationality and neutrality: rationality is corroborated, neutrality is rejected. However, this paper shows that, by correctly incorporating a long-run cointegrating relationship between money, output and interest rate in the form of an error-correction term, the test results are reversed, in that neutrality is no longer rejected.

Keywords: rationality; neutrality; error-correction (search for similar items in EconPapers)
JEL-codes: C32 E52 (search for similar items in EconPapers)
Pages: 7 pages
Date: 1993
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Citations: View citations in EconPapers (1)

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