Inferential expectations

Menzies, GD; Zizzo, D

Inferential expectations

Menzies, GD

Zizzo, D

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Publisher:: Berkley Press
Publication Type:: Journal Article
Citation:: B. E. Journal of Macroeconomics, 2009, 9 (1), pp. 1 - 25
Issue Date:: 2009-01

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Field	Value	Language
dc.contributor.author	Menzies, GD https://orcid.org/0000-0003-4133-2282	en_US
dc.contributor.author	Zizzo, D	en_US
dc.date.issued	2009-01	en_US
dc.identifier.citation	B. E. Journal of Macroeconomics, 2009, 9 (1), pp. 1 - 25	en_US
dc.identifier.issn	1935-1690	en_US
dc.identifier.uri	http://hdl.handle.net/10453/9938
dc.description.abstract	We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. Thus, if the test size is unity, agents hold rational expectations. We solve a Dornbusch-style model of exchange rates under rational expectations and inferential expectations. Under the latter we prove that the regression tests of Uncovered Interest Parity and the rational expectations version of the term structure display a downward bias. The model also explains delayed overshooting and sharp changes in exchange rates.	en_US
dc.publisher	Berkley Press	en_US
dc.relation.ispartof	B. E. Journal of Macroeconomics	en_US
dc.relation.isbasedon	10.2202/1935-1690.1710	en_US
dc.subject.classification	Economics	en_US
dc.title	Inferential expectations	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	9	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1403 Econometrics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	open_access
pubs.consider-herdc	true	en_US
pubs.issue	1	en_US
pubs.volume	9	en_US

Abstract:

We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. Thus, if the test size is unity, agents hold rational expectations. We solve a Dornbusch-style model of exchange rates under rational expectations and inferential expectations. Under the latter we prove that the regression tests of Uncovered Interest Parity and the rational expectations version of the term structure display a downward bias. The model also explains delayed overshooting and sharp changes in exchange rates.

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http://hdl.handle.net/10453/9938