GRANGER CAUSALITY, RATIONAL-EXPECTATIONS AND AVERSION TO UNEMPLOYMENTAND INFLATION

This paper presents a new test for rational expectations. This is done within the context of public concern, or aversion, over inflation and unemployment. It is found that inflation aversion Granger causes infl ation, but unemployment aversion does not Granger cause unemployment. This implies both that inflation aversion is partially determined by e xpected inflation and that such expectations have a rational element. However, rational expectations of unemployment do not determine unempl oyment aversion. The consequences of these results for political busin ess cycle theory are then examined.