Jd. Alba, ARE EXCHANGE-RATE EXPECTATIONS ADAPTIVE - EVIDENCE FROM A STRUCTURAL OPEN-ECONOMY MACRO MODEL, Journal of macroeconomics, 19(3), 1997, pp. 555-569
Although the assumption of rational expectations in open economy macro
economic modeling has become standard. practice in the last two decade
s, recent studies have shown that adaptive rather than rational expect
ations may be a better representation of exchange rate expectations. W
e use full-information, simultaneous-equation models for G-7 countries
to compare static and adaptive expectations and examine if adaptive e
xpectations are regressive or extrapolative. While we find adaptive ex
pectations to be regressive, static expectations cannot be rejected in
favor of adaptive expectations for four and five of the seven countri
es at the levels of significance of 5% and 1% respectively.