THE ESTIMATION OF SINGLE EQUATION RATIONAL EXPECTATIONS MODELS: AN APPLICATION TO UK CONSUMPTION
| Author | Andrew Scott,Donald Robertson |
| Published date | 01 May 1993 |
| DOI | http://doi.org/10.1111/j.1468-0084.1993.mp55002006.x |
| Date | 01 May 1993 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 55,2(1993)
0305-9049 $3.00
THE ESTIMATION OF SINGLE EQUATION
RATIONAL EXPECTATIONS MODELS:
AN APPLICATION TO UK CONSUMPTION
Donald Robertson and Andrew Scott
1. INTRODUCTION
The introduction of expectational variables into a regression model results in
serial correlation if the sampling interval is finer than the forecasting interval.
Unfortunately this serial correlation cannot be removed by the standard GLS
transform in a Rational Expectations (RE) model, as the transformed
variables are correlated with the disturbances (see Flood and Garber (1980)).
Section II of this paper outlines some proposed RE estimators valid in the
presence of serial correlation. A major problem with these estimators is their
computational requirements. All of them require an estimate of a TX T
covariance matrix, a non-trivial exercise with most standard econometric
packages. Section III outlines a menu driven computer package, SEREM,'
which is written in GAUSS and which calculates these Rational Expectations
estimators. Section IV applies these estimators to a modified form of the
Euler equation of Hansen and Singleton (1982, 1983) on UK consumption
data.
II. ECONOMETRIC PROBLEMS
In many economic models the econometrician has to explicitly deal with
agents' expectations. Expectations may enter as an independent variable, for
instance
y,=ßE,_kx, (1)
where E,- k denotes expectations formed on the t - k information set, or as a
dependent variable in the regression,
E, - k Y, = ßx, - k (2)
'Individuals interested in obtaining SEREM should send a cheque for £10, payable to
London Business School, addressed to Donald Robertson, Centre for Economic Forecasting,
London Business School, Sussex Place, London NW1 4SA. Please specify what size diskettes
you require. The fee includes post and packing plus any updates. SEREM only works within
GAUSS.
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