PRACTITIONERS’ CORNER: Unit Roots and Survey Data^*

Testing Rational Expectations Hypothesis in the Manufacturing Sector in Malaysia

“…However, for the forecast series to be regarded as a rational forecast of its realization series, the three necessary conditions noted by Fischer (1989) must be satisfied 2 . In this study, the results of unit root tests, as well as the Johansen and Juselius (1990) cointegration test, clearly complied with the requisites stated in Fischer (1989), indicating that the forecast series is a rational forecast of its actual series for both variables under study. However, satisfying the condition documented in Fischer (1989) is a necessary but insufficient condition for an investigated series to be regarded as rational in Muth's sense.…”

“…To conserve space, the unit root test results are not presented here, but they are available from the authors upon request.2 Fischer (1989) argued that in the context of REH, for an expectational series to be regarded as a rational forecast of its actual series, the survey-based forecast series (Π t * ) must be integrated in the I(1) process, Π t and Π t * must be cointegrated, and the cointegrating vector must be one.Ch.-H. Puah et al Testing rational expectations hypothesis in the manufacturing sector in Malaysia…”