The issues involved in assessing the relative performance of forward-looking (rational expectations) models and backward-looking error correction models based on the general-to-specific methodology are examined. Using the demand for M1 in the United Kingdom as a specific example, the authors...

This paper presents and estimates a model of the demand for money that explicitly embodies forward-looking behavior. Agents' money balances react differently to anticipated and unanticipated changes in income, prices, and interest rates. A multiperiod, rational expectations, quadratic costs of...