Does Anticipated Aggregate Demand Policy Matter?: Further Econometric Evidence
A heated debate has arisen over what Modigliani has dubbed the Macro Rational Expections (MRE) hypothesis. This hypothesis embodies two component hypotheses: 1) rational expectations and 2) short-run neutrality -- i.e., that anticipated changes in aggregate demand will have already been taken into account in economic agents' behavior and will thus evoke no output or employment response. Together these component hypotheses imply that deterministic feedback policy rules will have no effect on business cycle fluctuations. The irrelevance of these types of policy rules is inconsistent with much previous macro theorizing as well as with the views of policymakers. It is thus an extremely controversial proposition which requires a wide range of empirical research. This paper is a sequel to a previous paper by the author. That paper developed a methodology for testing the MRE hypothesis and found that anticipated money growth does matter to the business cycle. This paper extends the analyses to cases where the rate of nominal GNP growth or the inflation rate, rather than money growth, is the aggregate demand variable. The empirical results are also negative on the MRE hypothesis and its corresponding policy ineffectiveness proposition.
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aggregate demand policy aggregate demand variable anticipated aggregate demand anticipated nominal GNP asymptotic business cycle CM CM CM CM cn CM rH cn cn coefficients on unanticipated David Small demand policy matters demand policy variable Durbin-Watson Durbin-Watson statistic earlier paper error term F-statistic is distributed four lagged values Hypothesis Likelihood Ratio hypothesis of rationality Jean Grossman Joint Hypothesis Likelihood lag length Likelihood Ratio Statistic Likelihood Ratio Tests llOO macro Marginal Significance Level Martin Feldstein Models of TABLE money growth MPS data bank MRE hypothesis neutrality constraints Neutrality Likelihood Ratio NGNP nominal GNP growth null hypothesis output and unemployment output model quarterly rate rate of growth Ratio Statistic Marginal rational expectations rationality constraints Rationality Likelihood Ratio real GNP regression rejections rH rH Robert Barro serial correlation significant explanatory power standard errors Statistic Marginal Significance test statistics Thomas Sargent unanticipated inflation unconstrained system unemployment equations unemployment model