MACROECONOMIC MODELS, RATIONAL EXPECTATIONS AND THEIR APPLICATIONS TO FUTURES MARKETS

Keynesians, Monetarists, and New Classicals present similar views on unemployment and inflation rates when the economy is operating at full employment. These three competing macroeconomic theories believe that, when the economy is at steady state, equilibrium monetary policy cannot affect the equilibrium rate of unemployment. Further, in this case an increase in the rate of growth of the real money supply will only cause an increase in the rate of inflation. The source of conflict among these economic theories is in the macrodynamics of unemployment and inflation when the economy is operating at less than full employment.;The overall results of the study from the point of view of this objective appear to provide relatively strong support for the Monetarist propositions with regard to their predictions on the rates of unemployment and inflation. On the other hand, the results are less supportive of the Keynesian propositions. In addition, the findings of this study indicate that the New Classical autoregressive models, which are designed to predict the current interest rate, foreign exchange rate, and other commodity prices, are strongly supported empirically for the period of this study.;The second objective of this study is related to the rational expectations hypothesis, the underlying assumption of which is that expectations are essentially the same as the predictions of the relevant economic theory. This hypothesis implies that economic agents are rational in the sense that they use all the available information to predict the key economic variables. Furthermore, this hypothesis claims that, since the rational decision-makers know the true characteristics of economic variables, they can predict the future value of these variables without making systematic errors.;The second objective of this study is to test the forecasting ability of the rational expectations model in different markets. The results of this study for five major currencies in the foreign exchange futures market and several assets in the commodity futures market seem to show that the market-based forecasts are reasonably good predictors in the short run. However, the existence of a serious serial correlation in the error terms for some forecasts with longer maturities appear to be inconsistent with the rational expectations model making the investigation for an alternative model desirable.;The first objective of this study is to estimate a set of dynamic models which are used to test the major macroeconomic propositions of the Keynesians, the Monetarists, and the New Classicals by using data for Group Ten Countries for the period of 1958 to 1981. The empirical results used to compare these three macroeconomic models are based on the estimated models on unemployment rate, inflation rate, and interest rate.