On the power of direct tests for rational expectations against the alternative of constant gain learning

Abstract

In this paper we study the power of direct tests for rational expectations against the constant gain learning alternative. The investigation is by means of a Monte Carlo study. The tests considered use quantitative expectations data and qualitative survey data that has been quantified. The main finding is that the power of tests for rational expectations against constant gain learning may be very small, making it impossible to distinguish the hypotheses.adaptive learning, tests for rational expectations, quantification methods, constant gain least squares