money anticipated changes and policy effectiveness the lucas sargent wallace l s w proposition states that expected policy changes have no influence on real economic variables even in the short run see robert lucas 1972 and thomas sargent and neil wallace 1975 one form of empirical test of the l s w proposition the neutrality proposition began with robert barro s 1977 1978 seminal articles supporting the neutrality proposition however more recent papers including those by david small 1979 john makin 1982 and frederic mishkin 1982a b have reexamined the relationships between anticipated and unanticipated money vs output unemployment and inflation and have found evidence suggesting that anticipated monetary changes do have real effects all of the above cited studies use expectations procedures which estimate for example a money growth equation over the entire period under consideration however this approach assumes that when expectations are being formed at the beginning of the period economic agents have the relevant information for the entire period in this note i reexamine the impact of expected vs unexpected monetary changes focusing on the informational restrictions actually faced by economic agents when formulating expectations the structure of the model used here is similiar to the models of barro and mishkin a measure of real output is assumed to be a function of a policy variable and a vector of predetermined variables the policy variable can be decomposed into anticipated and unanticipated components algebraically

supply side macro economics this paper tests new classical and keynesian explanations of output determination within an encompassing factor utilization model wherein the output decision by producers is modelled as the choice of a utilization rate for employed factors in this encompassing model the ratio of actual to normal output with the latter defined by a nested ces vintage production function with capital energy and employment as factor inputs is explained by unexpected sales a keynesian element abnormal profitability one component of which is the lucas price surprise effect and abnormal inventories results using canadian data show that the keynesian and new classical elements contribute explanatory power as does the production function based measure of normal output while each of these partial models is strongly rejected in favour of the encompassing model the highly structured factor utilization model is also seen to fit better than an unstructured var model u s data confirm the results and show that there are significant effects from abnormal demand profitability and inventory levels even if the labour and capital components of normal output are defined using hours and utilized capital rather than employment and the capital stock the results are also confirmed using alternative output and hence input concepts using a translog function instead of a ces function to define normal output and using data for several other major industrial countries this abstract was borrowed from another version of this item

an econometric investigation of the monetary neutrality and rationality propositions from an international perspective t he combination of the natural rate of unemployment and the rational expectations hypotheses in macroeconomic models results in the now well known conclusion that anticipated short run monetary stabilization policies do not influence real economic variables this policy ineffectiveness proposition has been named the macro rational expectations mre hypothesis by modigliani 1977 as a result the implicit policy prescription is that a price level stabilization policy should be pursued the empirical validity of this conclusion is perhaps the central issue in modern stabilization theory barro 1977 1978 1981 barro and rush 1980 and leiderman 1980 have presented empirical evidence for the united states supporting this proposition however a number of recent studies have claimed that previous empirical results which support the finding that anticipated policy is neutral are flawed corrections of these problems often result in conflicting conclusions see small 1979 gordon 1979 and mishkin 1982 given the important implications of the mre hypothesis it is curious that almost all formal testing has been focused upon the united states while barro has suggested that a cross country study would be useful as far as we know only darby 1980 attempts to test whether anticipated changes in monetary policy are neutral across countries unfortunately his results suffer from problems caused by using generated regressors in addition he makes no attempt to test the individual implications of the mre hypothesis which encompasses the propositions that expectations are rational lad anticipated monetary policy does not matter in this paper we employ the methodology developed by mishkin to test the mre hypothesis in six countries canada germany italy japan the united kingdom and the united states the paper is divided into three major sections and a conclusion section ii briefly reviews mishkin s testing method in section iii the procedure employed to specify the money growth equation is discussed and these equations specified section iv presents and discusses the results of applying the method introduced in section ii in the conclusion the major findings are restated possible limitations discussed and extensions suggested

unanticipated inflation and economic activity abstract this paper presents a new empirical test of the expectations adjusted supply fucntion obtaining the market s inflationary expectations from the market interest rate the results support the existence of a positive relationship between unanticipated inflation and the level of economic activity while anticipated inflation seems to have no effect

monetary anticipations and the demand for money reply to mackinnon and milbourne abstract mackinnon and milbourne 1984 in an extended comment on carr and darby 1981 claim that money supply shocks do not enter the money demand function for the united states this reply discusses the economic and econometric errors which led to this conclusion and presents further empirical evidence in support of our approach

wage stickiness and the non neutrality of money a cross industry analysis abstract the paper provides an empirical test of sticky wage models of business fluctuations by focusing on industry level cross sectional implications that emerge this breaks the observational equivalence existing at the aggregate level between rational expectations long term contracting and imperfect information models the specific implication tested is whether output responses to nominal disturbances industry phillips curve slopes are inversely related to wage indexation elasticities the phillips curve slopes are found to vary across industries for the canadian economy but bear no relationship to indexation elasticities casting doubt on the role of nominal wage rigidity in generating the observed non neutrality of money

the estimation of surprise models and the surprise consumption function in the first part of the paper we outline a method for estimating a class of models in which news or surprises appear and expectations are formed rationally the method is an extension of the errors in variables method of mccallum and wickens as a by product some of pagan s results on the circumstances under which the commonly used two step method of estimating surprise models is efficient are shown to be a consequence of well known theorems on the efficiency of sub system estimation when a subset of equations are exactly identified in the second part of the paper the method is applied to hall s random walk model of consumption which is extended to allow for stochastic interest rates and for leisure and government spending to be substitutes for private spending the extended formulation is a great deal more successful at capturing the salient features of the data we also derive approximate restrictions across the parameters of the model due to the rational expectations hypothesis but find that they are marginally rejected by the data finally we evaluate the ability of the life cycle with rational expectations model to encompass alternative models

money and output in latin america some tests of a rational expectations approach abstract this paper deals with the relationship between money and output in sixteen latin american countries making use of the framework of analysis elaborated by robert barro for the united states three closely interrelated hypotheses are tested 1 that the growth of the money supply is predictable in that it differs from a random walk with trend 2 that only the part of money growth which is not predicted will affect real output in the short run and 3 that as lucas has argued the slope of the phillips curve is smaller in size for countries where money and prices are less predictable

unanticipated monetary growth output and the price level in latin america an empirical investigation abstract this paper provides statistical evidence on the response of real output and the price level to movements in unanticipated monetary growth for 16 latin american countries in the context of barro s version of the rational expectations natural rate theory arima p d q modeling of the growth rate of m2 is employed for each country and the residuals of the selected model utilized to estimate the parameters of the real output and price level equations careful attention is devoted to the autocorrelation structure of the residuals of the real output and price level equations the empirical results suggest that generally unanticipated monetary growth has positive effects on real output and negative effects on the price level such patterns however do not exhibit an unambiguous symmetric response

interpreting econometric evidence the behaviour of consumers expenditure in the uk abstract the dynamic models of consumers expenditure proposed by davidson et al 1978 and hendry and von ungern sternberg 1979 are re appraised in the light of hall s 1978 analysis of the empirical implications of the life cycle permanent income hypothesis in particular that the series for consumption should obey a random walk apart from trend in an attempt to reconcile the conflicting findings monte carlo experiments are used to demonstrate that if the davidson et al model were actually correct the hall model would appear to give a good description of the data and would probably not be rejected all the models are re estimated with new data for the uk and these data do reject a modified random walk specification in conclusion we discuss the issue of income exogeneity and comment on questions of model selection and interpretation

on the policy ineffectiveness proposition and a keynesian alternative a rejoinder i the basis of rush and waldo s rw results is the introduction of a war dummy variable in the dg equation this is however difficult to justify in the context of a rational expectations model under incomplete learning wars by their very nature are unique events and it is not clear how the public are supposed to learn the quantitative effects that the ending of three totally different wars may have had upon the growth of real government expenditure the fact that in i946 the public knew that world war ii was over does not mean that they could also estimate its precise quantitative effect on government expenditure rw estimate their dg equation using data for the whole of the period i943 73 and i943 85 thus implicitly assuming that all these data were available to the public in i946 for the computation of the coefficient of the war dummy in the dg equation but in i946 the public could not possibly have known about the timing and the intensities of the korean or the vietnam wars the assumption of complete learning that underlies the rational expectations hypothesis in general and rw s version of the nc model in particular is especially troublesome when the model contains dummy variables that correspond to unique events

money and disaggregate supply in the united states 1950 1982 the impact of money growth and money growth surprises on real output by sector is investigated it is shown that money provides a significant contribution to the explanation of the real output cycles in almost all sectors of the u s economy anticipated money is found to have real effects though there is some evidence that the real impact of money surprises is larger

a non nested test of the new classical neutrality proposition for canada this paper uses a non nested testing technique to test the neutrality proposition of the new classical economics a new classical model and an alternative model are estimated and tested against each other the test results indicate that the alternative model rejects the new classical model and that the neutrality proposition cannot be supported empirically

a critique of the proposed tests of the natural rate rational expectations hypothesis the failure of the governments of most industrialised countries over the past decade to deal successfully with the problems of rising unemployment and high and often accelerating rates of price and wage inflation has revived interest in the pre keynesian macro economics of sound money and has renewed the controversy of the 1930 s over what governments should or should not do if they wish to achieve full employment with reasonable price stability in democratic societies keynesian economics has come under attack both by those who primarily oppose interventionist policies on ideological grounds and by the so called new classical macro economists who adhere to the natural rate of unemployment hypothesis nrh advanced by phelps i967 and friedman i 968 and the hypothesis of rational formation of expectations reh originally due to muth i96i armed with this joint natural rate rational expectations nr re hypothesis the new classical macro economists have argued that in a world capable of being represented by linear or log linear relations with a unique and stable equilibrium and no information discrepancy between the government and the private sector no government macro economic policy whether monetary or fiscal no matter how ingeniously formulated and how effectively implemented can have any systematic or lasting impact upon the level of output or the rate of unemployment 2 clearly this fundamental policy

monetary anticipations and the demand for money abstract it has recently been argued that unanticipated changes in nominal money supply should affect the real demand for money and empirical results which appear to support this hypothesis have been presented unfortunately the econometric techniques used by previous authors yield severel biased estimates in this paper we show how valid estimates may easily be obtained and present some illustrative empirical results using u s data these results do not support the conclusions of earlier authors we find that unanticipated money supply changes do indeed affect the real demand for money but with the wrong sign and that anticipated changes also have a significant effect a consistency test for all models employing the anticipated unanticipated distinction is also proposed

anticipated monetary policy and real output evidence from latin american countries this paper is an empirical investigation of the effects of anticipated and unanticipated monetary policies on real output for 13 ldcs in latin and central america the well know mishkin econometric procedure is applied to the annual imf date for the decomposition of actual money growth into anticipated and unanticipated components and the evidence of significant relation between anticipated money supply and real output for each country is reported the results derived in this paper thus provide additional empirical support for the validity of the non classical rational expectations macro models of fisher and phelps and taylor

tests of rationality neutrality and market efficiency a monte carlo analysis of alternative test statistics abstract this paper examines the small sample properties of three testing strategies used to analyze the rationality monetary neutrality and market efficiency hypotheses we focus on the original two step barro test of the mre hypothesis formed entirely from ols results a test that employs the correct variance covariance formulae for these two step estimates and mishkin s fimle testing framework each test is examined under likely model respecifications the findings highlight the extensive bias incurred by drawing inferences from simple unadjusted two step estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses

news and the 1920 s experience with floating exchange rates in this paper the news approach to modelling the exchange rate is implemented for the inter war experience with floating exchange rates the results are shown to be broadly supportive of similar tests conducted for the 1970 s experience with floating

the singapore dollar tests of the efficient markets hypothesis and the role of news in this paper the efficient markets hypothesis emh is tested for the singapore dollar over the period from january 1978 to march 1983 the tests are conducted using the relationship between the spot foreign exchange rate and the corresponding lagged forward foreign exchange rate the tests consist of an unbiasedness test an error orthogonality test and a test of the impact of news in the singapore foreign exchange market the results indicate a certain degree of independence in the implementation of monetary policy for the singapore monetary authority

let them cheat abstract we consider the problem of fairly allocating a bundle of infinitely divisible goods among a group of agents with classical preferences we propose to measure an agent s sacrifice at an allocation by the size of the set of feasible bundles that the agent prefers to her consumption as a solution we select the allocations at which sacrifices are equal across agents and this common sacrifice is minimal we then turn to the manipulability of this solution in the tradition of hurwicz 1972 we identify under some mild assumptions on preferences the equilibrium allocations of the manipulation game associated with this solution when all commodities are normal for each preference profile each equal division constrained walrasian allocation is an equilibrium allocation conversely each equilibrium allocation is equal division constrained walrasian furthermore we show that if normality of goods is dropped then equilibrium allocations may not be equal division constrained walrasian

econometric issues in macroeconomic models with generated regressors the paper critically reviews the literature on the econometric issues raised by the use of generated regressors gr in empirical models the economic rationale for the use of gr is considered with examples being drawn from several macroeconomic examples including new classical macroeconomic ncm models which postulate monetary neutrality various estimation methods are discussed for models which include surprise or unexpected terms and the strengths and weaknesses of each approach are investigated drawing upon the work of mcaleer and mckenzie 1991 situations where the typically inefficient two step estimation 2se method will be efficient are highlighted problems of model misspecification and measurement errors are also investigated an empirical section highlights some of the dangers of using uncorrected 2se estimation results through a careful consideration of many recent attempts to test the ncm monetary neutrality hypothesis copyright 1993 by blackwell publishers ltd

the effects on output of anticipated and unanticipated money growth a case study of an oil producing country the new classical macroeconomic hypotheisis regarding the effecs of money growth on real variables sugggests that the anticipated changes in money supply on real variables are neutral irrespective of the time horizon whereas the unanticipated changes in the money supply although neutral in the long run exert significant influence on real variables in the short run this proposition has produced unsettled empirical results the present study attempts to verify empirically the new classical hypothesis in the case of a developing oil producing middle eastern country iraq our study suggests that the anticipated components of money growth rates have positive and significant influence on real variables the results of this study do not lend support to the new classical hypothesis instead they suggest that a steady growth rate of money supply that is fully anticipated by economic agents builds confidence by reducing errors in expectation regarding the behaviour of the money supply and provides easier ac

a quarterly model of unanticipated monetary growth output and the price level in the u k 1963 1978 abstract this paper develops and estimates using quarterly data from 1963 to 1978 a three equation model of the u k economy in which output is affected only by unanticipated monetary growth whereas the price level is influenced by both anticipated and unanticipated changes in the money supply expectations of monetary growth are assumed to be muth rational the model was estimated using efficient procedures and tests of the over identifying restrictions were favourable to the model specification in particular anticipated monetary growth was found to have no significant effect on output

non nested tests of new classical versus keynesian models further evidence this paper re runs the experiment conducted by dadkhah and valbuena 1985 using data generated by the australian canadian japanese swiss and swedish economies the aim of this exercise is to discriminate between new classical and keynesian accounts of the business cycle the results obtained in the present study are broadly supportive of dadkhah and valbuena s earlier findings in that the keynesian model generally outperforms the new classical alternative

new results in support of the fiscal policy ineffectiveness proposition the authors demonstrate that previous tests of money and fiscal policy ineffectiveness are likely to be biased because they ignore interaction effects between policies the authors empirical analysis of u s experience supports the short run ineffectiveness of anticipated and unanticipated fiscal policy in contrast to other empirical research but similarly to most other studies rejects the short run neutrality of anticipated money however they find that in the longer run all policies either anticipated or unanticipated have had neutral effects on u s output growth copyright 1990 by ohio state university press

monetary anticipation and the demand for money in the u k testing rationality in the shock absorber hypothesis the carr darby shock absorber hypothesis that unanticipated changes in the money supply cause changes in real balances but anticipated changes have a unit impact on the price level and therefore leave real balances unchanged is tested using two step and joint estimation techniques for the u k two step methods appear to support the shock absorber hypothesis but the superior joint estimation technique decisively rejects the hypothesis particularly the implicit rational expectations cross equation restrictions

surprises in the consumption function the life cycle hypothesis has been the dominant theoretical basis for empirical work on the aggregate consumption function for about a quarter of a century under it real consumption is proportional to real life cycle wealth where the factor of proportionality depends on real interest rate expectations and the demographic structure of the population life cycle wealth is the sum of financial and human wealth however because the latter is the present real value of the stream of labour and transfer income expected over the life cycle it is not directly observable this fact has led to a great variety of proxying devices in empirical applications and in consequence much looseness in the interpretation of very different models as being all consistent with life cycle theory indeed one can argue that this has protected the hypothesis from being seriously tested and perhaps rejected an insight associated with friedman 1957 is that the view taken by consumers of life cycle income does not alter by much from period to period since there is greater persistence in life cycle income than in current income this also explains the greater persistence of consumption than of current income intuitively this would suggest that lagged consumption being related to last period s perception of life cycle income which in turn is not much different from this period s perception should have a major role in predicting current consumption this intuition was formalised by hall 1978 using ideas familiar from the study of stock market prices and the term structure of interest rates hall showed that if the real rate of interest is constant and given a number of other assumptions including no transitory element in consumption then the life cycle hypothesis implies that

unexpected monetary disturbances during the gold standard era abstract this empirical paper uses the barro methodology of estimating unexpected monetary shocks to determine the effect these shocks had on real output in the u s during the gold standard era between 1880 and 1913 it also investigates whether changes in a measure of financial intermediation had real effects the results indicate that neither expected nor unexpected money shocks affected output changes in financial intermediation however were significantly correlated with output this result lends support to theories which stress the endogeneity of broad measures of the money supply

the policy ineffectiveness proposition some further tests abstract this study investigates for denmark the relative merits of the new classical versus the monetarist hypotheses regarding the role of monetary policy in stabilizing real economic activity the results do not reject the monetarist contention that anticipated systematic monetary policy has a significant effect on real output in the short run a finding that is inconsistent with the new classical policy ineffectiveness proposition

does anticipated monetary policy matter an econometric investigation a heated debate has arisen over the policy ineffectiveness proposition associate with the work of lucas sargent and wallace it postulates that anticipated aggregate demand policy will have no effect on business cycle fluctuations so that one deterministic feedback policy rule is as good as any other from the point of view of stabilizing the economy this paper develops a methodology for empirically analyzing rational expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle

on the policy ineffectiveness proposition and a keynesian alternative one of the most controversial macroeconomic developments of the last decade has been the rise of the so called new classical nc approach to macroeconomic theory and policy lucas i972 sargent and wallace i975 and barro i 976 have presented models which combine the friedman i968 phelps i970 natural rate theory with assumptions of market clearing and rational expectations as is well known these models deliver the striking result that the mean values of real variables cannot be affected by the government s monetary policy the publication of the theoretical work establishing the impotency result led to much empirical testing of the nc models one of the most successful approaches from the point of view of nc advocates is contained in a series of papers by barro i977 i978 i98i barro and rush i980 and rush i986 recently pesaran i982 has questioned barro s results and claimed that once an implausible assumption is discarded barro s work can be rejected in favour of a keynesian alternative because pesaran has put forth an explicit counter model to barro s work his results are potentially quite important this paper examines in detail pesaran s work and conclusions

unanticipated monetary growth output and the price level u k 1946 1977 abstract this paper develops and estimates using annual data from 1946 1977 a three equation model of the u k economy in which output is affected only by unanticipated monetary growth whereas the price level is influenced by both anticipated and unanticipated changes in money supply expectations of monetary growth are assumed to be muth rational the model was estimated using efficient procedures and tests of the over identifying restrictions were generally favourable to model specification some features of the price equation are unsatisfactory and the results in this section must be considered tentative

do prices lead money a reexamination of the neutrality hypothesis do prices lead money a reexamination of the neutrality hypothesis in one class of theoretical models real effects occur only if changes in money growth are expected to occur in some future period if expected in the current period they are neutral some empirical models examine the neutrality of expected current money growth and therefore do not directly address the neutrality of expected future growth this paper develops an empirical model that explicitly incorporates expected future changes in money growth a reexamination of the rationality neutrality and macro rational expectations hypotheses over a sample of four countries suggests that the use of expected future money growth results in strong rejections of the neutrality hypothesis i introduction the revolution in macroeconomics inspired by the theory of rational expectations called into question the ability of systematic monetary policy to affect real economic variables much research has been devoted to the issue of policy effectiveness in the last decade and many examples have been constructed that demonstrate the theoretical possibility of nonneutrality even when expectations are formed rationally one result of this research has been to demonstrate that the expectation of a future change in the money growth rate can cause a change in the current value of real output in these models an expected change in money growth at some point in the future results in a change in the price level in all time periods prior to the change in the money growth rate this phenomenon of prices leading money see brock 1974 751 results in a change in real money balances in each time period prior to the expected change in the money growth rate and the change in real money balances results in nonneutral changes in real output in order for the nonneutrality result to hold in this class of models it is essential that the expected change in money growth be in some future time period so that prices and hence real balances change prior to the change in the money growth rate when the change in money growth is expected to occur in the current time period rather than in the future prices and the money supply change proportionately leaving the value of real balances unchanged in this case there is no change in real output this difference in the theoretical predictions concerning the neutrality of expected future and expected current changes in the money growth rate has implications for empirical tests of the neutrality hypothesis according to these models such tests ought to examine the significance of the relationship between the current value of real output and expected future changes in money growth tests of the neutrality hypothesis performed in the past such as those by barro 1977 1978 mishkin 1982 1983 and hoffman and schlagenhauf 1982 have examined the significance of the empirical relationship between the current value of real output and the expected current money growth rate thus these empirical models do not capture the crucial distinction between current and future changes in money growth rates this paper develops an empirical model based on expected future rather than expected current changes in the money growth rate in the real output equation and then reexamines the neutrality hypothesis the issue of whether expectations are formed rationally is also important in the analysis of the empirical evidence for the neutrality hypothesis as mishkin 1982 1983 points out the neutrality hypothesis has little meaning without a theory of expectation formation in light of this tests of the rationality hypothesis as well as the joint hypothesis of rationality and neutrality known as the macro rational expectations hypothesis 1 mre are also conducted ii theoretical models of nonneutral money in many equilibrium rational expectations models the neutrality of money depends upon whether an expected change in the money supply is in the current or some future time period

unanticipated money growth and unemployment post sample forecasts in the late 1970s robert j barro published what has since become a popular model of business fluctuations barro s 3 findings provide evidence advocating the short run neutrality of money under rational expectations forging an important empirical link to the theoretical studies of lucas 19 20 and sargent and wallace 33 the original barro unemployment model has received additional support from further statistical testing 5 6 15 despite criticisms and modifications some of which are considered in barro s 6 updated model these equations have inspired numerous empirical studies analyzing unanticipated effects of macroeconomic variables this paper examines post sample forecasts of barro s original 3 and revised 6 unemployment equations for the 1974 84 period mayer 23 24 harvey 13 179 80 and lovell 18 among many contend that the ability to successfully forecast outside of the sample period is an important criterion for evaluating model robustness this view is also reflected in a substantial body of studies including 10 25 26 29 39 which investigate the post sample predictive performance of macroeconomic models one year ahead forecasts indicate that the barro 3 6 equations accurately predict unemployment for the 1974 79 period during 1980 84 however the predictive performance of both models sharply deteriorates augmenting the barro models with interest rate volatility in accordance with the findings of evans 11 and tatom 38 considerably improves the overall forecasting ability this modification also rectifies the 1980s structural instability of the barro unemployment equations furthermore the basic conclusions of the seminal barro work are retained with this augmented model the results reveal that increases in interest rate volatility exert significantly adverse effects upon unemployment corroborating with the findings of evans 11 and tatom 38 still interest rate volatility could be overlooked in previous estimations of the barro or other models of business fluctuations due to the variable s relative constancy prior to 1979

anticipated money inflation uncertainity and real economic activity this paper critically examines a number of maintained hypotheses that are necessarily being tested along with the basic notion derived from the rational expectations re formulation of lucas 1972 19 73 that only unanticipated money matters the trend stationary representation of secular real output of lucas and others is replaced by a difference stationary representation found by nelson and plosser 1980 to be consistent with u s historical data the impact of inflation uncertainty on real activity is considered attention is paid to possible mis measurement of agents ex ante anticipated money growth it is found that three alternative measures of anticipated money growth produce a stable impact on growth of output and employment contemporaneous and lagged values of unanticipated money growth have no significant additional explanatory power in the presence of any one of the three measures of anticipated money growth beyond this it is impossible to reject the hypothesis that the initial positive real impact of anticipated money is not temporary inflation uncertainty is found to act as a significant depressant of real economic activity in the presence of all tested combinations of anticipated and unanticipated money growth this abstract was borrowed from another version of this item

keynesian and new classical models of unemployment revisited several keynesian and new classical models of unemployment for the united states are reevaluated the models are examined for adequacy by testing the cross equation restrictions where appropriate and using diagnostic and nonnested tests that explicitly recognize the problem introduced by generated regressors the best new classical model for the 1946 73 period is found to be adequate when it is estimated over the 1946 85 period whereas the keynesian model is not existing results of tests obtained at the single equation level ignoring generated regressors are not always supported when the test statistics are calculated using the correct covariance matrix or maximum likelihood copyright 1991 by royal economic society