CONSUMER CONFIDENCE AND RATIONAL-EXPECTATIONS - ARE AGENTS BELIEFS CONSISTENT WITH THE THEORY

Using UK data the REPIH is rejected due to the predictive content of c onsumer confidence, and not labour income or any other macroeconomic v ariable. We provide evidence suggesting that this cannot be explained by liquidity constraints and account for this finding in terms of prec autionary saving. Extending the CCAPM model to allow a time varying co nditional variance we find a high level of confidence is associated wi th greater optimism about the level of consumption but also a higher f orecast variance. Allowing for time aggregation, the overidentifying r estrictions implied by this model are accepted. We estimate a small bu t statistically significant intertemporal elasticity of substitution.