Nagesh S Revankar

Testing of the Rational Expectations Hypothesis

This paper develops a test of the rational expectations hypothesis advanced by Muth [18]. The framework considered here allows for multiperiod expectations of several endogenous variables, with or without lagged exogenous variables. In conventional (linear) models, the hypothesis implies that the expectations are linear in certain relevant variables, and restricts the coefficients of these variables to be certain functions of the parameters in the imbedding model. The test is developed as a test of the validity of these restrictions. The paper also treats the estimation problem in some details, under the alternative hypothesis which is taken as simply the negation of the rational expectations hypothesis.

Exact Equivalence of Instrumental Variable Estimators in an Error Component Structural System

The paper establishes an equivalence result in the context of anm-equation error component structural system, whose disturbances have the usual three-component structure, and whose equations feature explanatory variables of the formzi, zt andzit; the latter vary (respectively) only over individuals, only over time, and over both. Under the stochastic specification assumed, it is shown that the alternative instrumental variables (IV) estimators commonly used in the special cases of this system are all equivalent (numerically identical); the result is a generalization of the equivalences established previously for the special cases. In the single equation (m=1) context, the equivalence requires that the IV set contain variables of the formzi and/orzt, and further, in numbers determined by the ranks of (respectively) the individuals-mean and time-mean matrices of the instruments. If such an IV set is common to all equations, the equivalence also holds for the system under joint estimation. The result is used to recommend a couple of estimators for use in panel data, on grounds of computational simplicity.