FRB: Encompassing and Rational Expectations: How Sequential Corroboration Can Imply Refutation

International Finance Discussion Papers

Encompassing and Rational Expectations: How Sequential Corroboration Can Imply Refutation
Neil R. Ericsson and David F. Hendry
1989-354 (June 1989)

Abstract: Even though pieces of empirical evidence individually may corroborate an economic theory, their joint existence may refute that same theory. We discuss examples concerning testing for omitted variables, simultaneity, and rational expectations in the context of general-to-simple versus simple-to-general modeling. The proposition in the first sentence strongly favors the building of empirical models which are consistent with all available evidence.

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