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This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: A Rational Expectations Approach to Macroeconomics: Testing Policy Ineffectiveness and Efficient-Markets Models Volume Author/Editor: Frederic S. Mishkin Volume Publisher: University of Chicago Press Volume ISBN: 0-226-53186-4 Volume URL: http://www.nber.org/books/mish83-1 Publication Date: 1983 Chapter Title: Front matter, A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models Chapter Author: Frederic S. Mishkin Chapter URL: http://www.nber.org/chapters/c10240 Chapter pages in book: (p. -13-0)

A Rational Expectations Approach to Macroeconometrics

A National Bureau of Economic Research Monograph

A Rational Expectations Approach to ~acroeconornetrics Testing Policy Ineffectiveness and Efficient-Markets Models Frederic S. Mishkin The University of Chicago Press Chicago and London

The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London 1983 by the National Bureau of Economic Research All rights reserved. Published 1983 Paperback edition 1983 Printed in the United States of America 90 89 87 86 85 543 Library of Congress Cataloging in Publication Data Mishkin, Frederic S. A rational expectations approach to macroeconometrics. (A National Bureau of Economic Research monograph) Bibliography: p. Includes index. 1. Rational expectations (Economic theory) 2. Macroeconomics. 3. Econometrics. I. Title. II. Series. HB172.5.M57 1983 339'.0724 82-20049 ISBN 0-226-53186-4 (cloth) 0-226-53187-2 (paper)

NBER Board of Directors Officers Walter W. Heller, chairman Franklin A. Lindsay, vice-chairman Eli Shapiro, president David G. Hartman, executive director Charles A. Walworth, treasurer Sam Parker, director offinance and administration Directors at Large Moses Abramovitz George T. Conklin, Jr. Morton Ehrlich Edward L. Ginzton David L. Grove Walter W. Heller Franklin A. Lindsay Roy E. Moor Geoffrey H. Moore Michael H. Moskow James J. O'Leary Peter G. Peterson Robert V. Roosa Richard N. Rosett Bert Seidman Eli Shapiro Stephen Stamas Lazare Teper Donald S. Wasserman Marina v.n. Whitman Directors by University Appointment Charles H. Berry, Princeton Otto Eckstein, Harvard Walter D. Fisher, Northwestern J. C. LaForce, California, Los Angeles Paul McCracken, Michigan Daniel McFadden, Massachusetts Institute of Technology Almarin Phillips, Pennsylvania James L. Pierce, California, Berkeley Nathan Rosenberg, Stanford James Simler, Minnesota James Tobin, Yale Willianl S. Vickrey, Columbia Dudley Wallace, Duke Burton A. Weisbrod, Wisconsin Arnold Zellner, Chicago Directors by Appointment of Other Organizations Carl F. Christ, American Economic Association Robert C. Holland, Committee for EconOlnic Development Stephan F. Kaliski, Canadian Economics Association Albert G. Matamoros, National Association of Business Economists Douglass C. North, Economic History Association Rudolph A. Oswald, American Federation of Labor and Congress of Industrial Organizations Joel Popkin, American Statistical Association G. Edward Schuh, American Agricultural Economics Association Albert Sommers, The Conference Board James C. Van Horne, American Finance Association Charles A. Walworth, Afnerican Institute of Certified Public Accountants Directors Emeriti Arthur Burns Emilio G. Collado Solomon Fabricant Frank Fetter Thomas D. Flynn Gottfried Haberler Albert J. Hettinger, Jr. George B. Roberts Murray Shields Boris Shishkin Willard L. Thorp Theodore O. Yntema

Relation of the Directors to the Work and Publications of the National Bureau of Economic Research 1. The object ofthe National Bureau ofeconomic Research is to ascertain and to present to the public important economic facts and their interpretation in a scientific and impartial manner. The Board ofdirectors is charged with the responsibility ofensuring that the work of the National Bureau is carried on in strict conformity with this object. 2. The President of the National Bureau shall submit to the Board of Directors, or to its Executive Committee, for their formal adoption all specific proposals for research to be instituted. 3. No research report shall be published by the National Bureau until the President has sent each member of the Board a notice that a manuscript is recommended for publication and that in the President's opinion it is suitable for publication in accordance with the principles of the National Bureau. Such notification will include an abstract or summary of the manuscript's content and a response form for use by those Directors who desire a copy of the manuscript for review. Each manuscript shall contain a summary drawing attention to the nature and treatment of the problem studied, the character of the data and their utilization in the report, and the main conclusions reached. 4. For each manuscript so submitted, a special committee of the Directors (including Directors Emeriti) shall be appointed by majority agreement of the President and Vice Presidents (or by the Executive Committee in case of inability to decide on the part of the President and Vice Presidents), consisting of three Directors selected as nearly as may be one from each general division of the Board. The names of the special manuscript committee shall be stated to each Director when notice of the proposed publication is submitted to him. It shall be the duty of each member of the special manuscript committee to read the manuscript. Ifeach memberofthe manuscript committeesignifies his approvalwithinthirty days of the transmittal of the manuscript, the report may be published. If at the end of that period any member of the manuscript committee withholds his approval, the President shall then notify each member of the Board, requesting approval or disapproval of publication, and thirty days additional shall be granted for this purpose. The manuscript shall then not be published unless at least a majority ofthe entire Board who shall have voted on the proposal within the time fixed for the receipt of votes shall have approved. 5. No manuscript may be published, though approved by each member of the special manuscript committee, until forty-five days have elapsed from the transmittal of the report in manuscript form. The interval is allowed for the receipt ofany memorandum ofdissent or reservation, together with a brief statement of his reasons, that any member may wish to express; and such memorandum of dissent or reservation shall be published with the manuscript if he so desires. Publication does not, however, imply that each member of the Board has read the manuscript, or that either members ofthe Board in general or the special committee have passed on its validity in every detail. 6. Publications of the National Bureau issued for informational purposes concerning the work of the Bureau and its staff, or issued to inform the public of activities of Bureau staff, and volumes issued as a result of various conferences involving the National Bureau shall contain a specific disclaimer noting that such publication has not passed through the normal review procedures required in this resolution. The Executive Committee of the Board is charged with review ofall such publications from time to time to ensure that they do not take on the character offormal research reports of the National Bureau, requiring formal Board approval. 7. Unless otherwise determined by the Board or exempted by the terms ofparagraph 6, a copy of this resolution shall be printed in each National Bureau publication. (Resolution adopted October 25, 1926, as revised through September 30, 1974)

To My Father

Contents Acknowledgments 1. Introduction 1 xi Part I Econometric Theory and Methodology 2. The Econometric Methodology 9 Appendix 2.1 Identification and Testing 27 Appendix 2.2 An Annotated Computer Program 32 3. An Integrated View of Tests of Rationality, Market Efficiency, and the Short-Run Neutrality of Aggregate Demand Policy 44 Part 2 Empirical Studies 4. Are Market Forecasts Rational? 59 5. Monetary Policy and Interest Rates: An Efficient Markets-Rational Expectations Approach 76 Appendix 5.1 Estimates of the Forecasting Equations 97 Appendix 5.2 Additional Experiments Using the Two-Step Procedure 103 6. Does Anticipated Aggregate Demand Policy Matter? 110 ix

x Contents Appendix 6.1 Output and Unemployment Models with Barro and Rush Specification 129 Appendix 6.2 Results with Nominal GNP Growth and Inflation as the Aggregate Demand Variable 133 Appendix 6.3 Results Not Using Polynominal Distributed Lags 143 Appendix 6.4 Jointly Estimated Forecasting Equations 150 7. Concluding Remarks References Index 156 159 169

Acknowledgments This book developed from a line of research that I have pursued for several years. In the process I built up an intellectual debt to many individuals who provided me with comments on my work and, by so doing, improved it substantially. My former colleague, Andrew Abel, is owed the greatest debt. Part of this book-chapter 3 and Appendix 2.1 to Chapter 2-is based on joint research we worked on together at the University of Chicago. Andy not only stimulated my thinking in this line of research but also showed me how much fun joint work can be. I also thank the following other individuals who gave me valuable comments: Ben Bernanke, John Bilson, Olivier Blanchard, Edwin Burmeister, Dennis Carlton, Eugene Fama, Robert Flood, Jacob Frenkel, David Galenson, Peter Garber, Clive Granger, Nathaniel Gregory, Lars Hansen, Fumio Hayashi, Dennis Hoffman, John Huizinga, Stephen LeRoy, Robert Lucas, Thomas Mayer, Bennet McCallum, Merton Miller, Ronald Michener, Michael Mussa, A. R. Nobay, Charles Plosser, Thomas Sargent, Don Schlagenhauf, Williarrl Schwert, Steven Sheffrin, Robert Shiller, Kenneth Singleton, Gary Skoog, and Mark Watson. I benefited from comments at seminars where I presented preliminary versions of this work-at the American Economic Association winter meetings; Cornell University; the University of California at Berkeley, at Davis, and at San Diego; the University of Chicago; the University of Pennsylvania; the University of Michigan; the Universite de Montreal; the University ofvirginia; the Massachusetts Institute oftechnology; the National Bureau of Economic Research; and New York University. The students in my Economics 431 course during the Winter of 1982 at the University of Chicago performed the role of human guinea pigs by subjecting themselves to my teaching of this book. Their reactions and comments are greatly appreciated. xi

xii Acknowledgments I thank June Nason and Alyce Monroe for their typing services, and Alan Brazil and Douglas McTaggart for excellent research assistance. This book makes use of material from my articles published in American Economic Review, Journal of Finance, Journal of Monetary Economics, and Journal ofpolitical Economy. I am grateful to each of these journals for permission to use material from these articles. Research support from the National Science Foundation (NSF grants SES-7912655 and SES-8112004) is gratefully acknowledged. This work is part of the National Bureau of Economic Research's Program in Economic Fluctuations. The usual disclaimer applies.