Thomas Comment final to JEP

TESTING THE RATIONAL EXPECTATIONS HYPOTHESIS USING SURVEY DATA By Carl S. Bonham and Richard H. Cohen Working Paper No. 00-7 April 2000 Testing the Rational Expectations Hypothesis using Survey Data*Carl S. Bonham and Richard H. CohenApril 22, 2000 Because of the importance of inflation expectations, Lloyd B. Thomas Jr. (Fall1999, p. 125-44) reexamines "the evidence on the nature and performance of variousmeasures of expected inflation, with special attention given to the issue of rationality"(p. 126). Thomas studies the accuracy and rationality of one-year-ahead mean surveyforecasts of CPI inflation. He examines data from three different surveys: theLivingston Survey of professional economists, the Institute of Social Research(Michigan) Survey of Households, and the Federal Reserve Bank of Philadelphia’sSurvey of Professional Forecasters. Thomas tests the unbiasedness hypothesis usingthe Livingston and Michigan survey forecasts for the 1960 to 1997 time period and isunable to reject the null hypothesis of unbiasedness.Thomas warns of potential pitfalls in drawing inferences about rationality fromtests based on survey data. For example, agents may have insufficient incentive tomake optimal use of their resources when responding to the survey. A related issue isthat some forecasters may behave strategically and fail to reveal their true forecasts(Thomas, 1999, p. 137). ...