New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In this paper, we use maximum likelihood and generalized method of moments (GMM) methods to explore the empirical importance of output expectations. We find little evidence that rational expectations of future output help determine current output, especially after taking into account the small-sample bias in GMM.
Rudebusch, Glenn D., and Jeffrey C. Fuhrer. 2002. “Estimating the Euler Equation for Output,” Federal Reserve Bank of San Francisco Working Paper 2002-12. Available at https://doi.org/10.24148/wp2002-12