Rational expectations in price setting. Tests based on Norwegian export prices

Abstract

This paper uses imperfect competition as a basis for modelling the export price for an aggregated commodity produced by the Norwegian private mainland economy. The long run solution is analysed using a cointegration technique. The dynamics are modelled according to two different approaches; a backward looking error correction model and a forward looking model where rational expectations are assumed. The dynamic structure of the forward looking model is derived from a linear quadratic adjustment cost function under rational expectations, but the empirical results do not support this specification. We cannot reject super-exogeneity to be present in the backward looking error correction model. The empirical evidence are thus not consistent with rational expectations. Keywords: Export price, Imperfect competition, LQAC models, ECM, Cointegration, Rational expectation, Super exogeneity