Testing Myopia in Economic Models

Abstract

This paper suggests a simple test of whether agents are forward-looking or myopic that can be implemented on the type of backward-looking econometric models that are usually estimated.. We argue that myopic behaviour implies a simple parametric restriction that will not hold if agents are forward-looking. We illustrate our tests by examining price adjustment in the UK using aggregate quarterly data from 1963-1997. Our evidence strongly suggests that pricesetting is forward-looking and not myopic.