Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/193283 
Year of Publication: 
2018
Series/Report no.: 
IZA Discussion Papers No. 11989
Publisher: 
Institute of Labor Economics (IZA), Bonn
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. Next, we go beyond testing by defining and estimating the minimal deviations from rational expectations that can be rationalized by the data. In the context of structural models, we build on this concept to propose an easy-to-implement way to conduct a sensitivity analysis on the assumed form of expectations. Finally, we apply our framework to test for and quantify deviations from rational expectations about future earnings, and examine the consequences of such departures in the context of a life-cycle model of consumption.
Subjects: 
rational expectations
test
data combination
subjective expectations
sensitivity analysis
JEL: 
C12
D15
D84
Document Type: 
Working Paper

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