Testing exact rational expectations in cointegrated vector autoregressive models
type: Item
instance of: scholarly article
title: Testing exact rational expectations in cointegrated vector autoregressive models
zbMATH Open document ID: 0951.62094
DOI: 10.1016/S0304-4076(99)00004-4
author: Søren Johansen
author: Anders Rygh Swensen
published in: Journal of Econometrics
publication date: 2000-05-10T00:00:00Z
review text: Rational expectations are an important concept in theoretical as well as empirical economics. Typically, the hypothesis of rational expectations (REH) imposes nonlinear cross-equation restrictions on the coefficients of the equations of the model which are used to evaluate the model by testing the validity of the restrictions. Unfortunately, rational expectations cannot be observed directly so that in most cases some proxies have to be taken into account. To overcome the problem, one possibility, when the models contain stochastic elements, is to use conditional expectations in the probabilistic sense given some previous information. Yet there is another source of trouble. Usually, dynamic models containing rational expectations of future values have a multitude of solutions. \textit{R.T. Baillie} [Econ. Rev. 8, No. 2, 151-216 (1989; Zbl 0718.62284)] advocated a procedure for testing the restrictions implied by rational expectations on a set of variables by assuming that the solutions could be described by a VAR-model. This paper follows this line of research, but the authors put more emphasis on the proper specification of cointegration relationships. Especially, if the cointegration rank in the VAR model is larger than what is specified by the REH, then the remaining cointegration vectors that are used to transform to stationarity must then be estimated before the transformation is carried out. With respect to testing, this two-step procedure leads to a sort of Wald test to test the validity of the restrictions imposed. The authors present a sequence of likelihood ratio tests when the restrictions implied by the rational expectations hypothesis have a particular form. Starting with a VAR model, the authors assume that the variables are integrated of order one. They show that the restrictions on the expectations entail restrictions on the cointegrating relationships. Furthermore, some restrictions on the short-run parameters of the model must be satisfied. This app…
Mathematics Subject Classification ID: 62P20
Mathematics Subject Classification ID: 91B84
zbMATH DE Number: 1369434
zbMATH Keywords: cointegration
zbMATH Keywords: reduced rank regression
zbMATH Keywords: likelihood-ratio tests
zbMATH Keywords: rational expectations hypothesis
zbMATH Keywords: VAR model
zbMATH Keywords: present value model
MaRDI profile type: Publication
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full work available at URL: s0304-4076(99)00004-4
OpenAlex ID: W1964244431
description: scientific article; zbMATH DE number 1369434