Rational expectation variables in macroeconomic models: Empirical evidence for the Netherlands and other countries

Abstract

Rational expectations have obtained a prominent place in economic theory and econometric model building. However, this holds more for small, theoretical models than for large macroeconomic models. This paper deals with the introduction of rational expectation variables in MORKMON II, a macroeconomic model of the Dutch economy. Model equations with rational expectations are reestimated. Policy and impulse simulations are used to compare the adaptive expectation variant with the rational expectation variant of MORKMON II. It is found that rational expectations constitute a plausible alternative to adaptive expectations, but that the simulation effects only differ in the short run and in case of announcement effects. This result agrees with the findings of an international survey of macroeconomic models with rational expectations, that simulation effects generally differ little when equations with rational expectations are reestimated, but may differ substantially when reestimation has not been carried out.