Testing the Rational Expectations Hypothesis using Survey Data

Because of the importance of inflation expectations, Lloyd B. Thomas Jr. (Fall 1999, p. 125-44) reexamines "the evidence on the nature and performance of various measures of expected inflation, with special attention given to the issue of rationality" (p. 126). Thomas tests the unbiasedness hypothesis using the Livingston and Michigan survey forecasts for the 1960 to 1997 time period and is unable to reject the null hypothesis of unbiasedness. Unfortunately, two types of problems due to aggregation plague such tests: private information bias and micro-heterogeneity bias. Therefore, for these survey forecasts, consensus regressions should generally not be used to test rationality; rationality can only be tested at the individual level.