Rationalizing rational expectations: characterizations and tests

DOI10.3982/QE1724MaRDI QIDQ5164502zbMATH OpenOpenAlexFDO

Authors Xavier D'Haultfœuille, Christophe Gaillac, Arnaud Maurel

Publication date 11 November 2021

Published in Quantitative Economics (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial 4.0 International

Full work available at URL https://arxiv.org/abs/2003.11537

zbMATH Keywords

testrational expectationssubjective expectationsdata combination

Mathematics Subject Classification ID

Labor markets (91B39)

Abstract: In this paper, we build a new test of rational expectations based on the marginal distributions of realizations and subjective beliefs. This test is widely applicable, including in the common situation where realizations and beliefs are observed in two different datasets that cannot be matched. We show that whether one can rationalize rational expectations is equivalent to the distribution of realizations being a mean-preserving spread of the distribution of beliefs. The null hypothesis can then be rewritten as a system of many moment inequality and equality constraints, for which tests have been recently developed in the literature. The test is robust to measurement errors under some restrictions and can be extended to account for aggregate shocks. Finally, we apply our methodology to test for rational expectations about future earnings. While individuals tend to be right on average about their future earnings, our test strongly rejects rational expectations.

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