Summary
Korteweg extended the Barro, Lucas, Sargent, Wallace type of rational expectations model to a small open economy. This paper tests Korteweg's model with Dutch data. A major error in the specification and estimation is pointed out and corrected: the differenced expected variables are not defined consistently. This error implies that Korteweg's and Bomhoff's previous empirical results on the model are invalid. The test results for the corrected model indicate that this model has to be rejected for The Netherlands. The restrictions implied by an extremely simple empirical alternative are, however, not rejected.
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I would like to thank Dr. Th.E. Nijman, Professors F. van der Ploeg, W.H. Buiter and J.J.M. Theeuwes and Dr. A. J. de Zeeuw for their stimulus and helpful comments on previous versions of this paper, and Professor P. Korteweg for his open-minded attitude towards this research. Responsibility for the contents remains, of course, with the author. Financial help, from the ‘Stichting Bekker-La Bastide-Fonds’ and the ‘Stichting A.A. van Beek-Fonds’ is gratefully acknowledged.
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Mulder, C. Testing Korteweg's rational expectations model for a small open economy. De Economist 136, 22–49 (1988). https://doi.org/10.1007/BF02078538
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DOI: https://doi.org/10.1007/BF02078538