Do we reject rational expectations models too often?: Interpreting evidence using Nagar expansions

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Abstract

In a recent paper Mankiw and Shapiro presented Monte Carlo evidence assessing the over-rejection of the orthogonality condition which characterizes rational expectations models. The purpose of this note is two-fold — first, to construct a small sample approximation of the expected value of the t-statistic and second, to get a feeling for why the critical values obtained by MS are so disparate.

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Cited by (6)

The authors wish to thank Manuel Arellano for his help. Thanks are also due to David Hendry for his encouragement and much useful advice and to members of the Econometrics Workshop at Oxford for their comments. Any remaining errors are attributable solely to the authors.

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