The resting state hypothesis is a recent theoretical account of auditory verbal (AVH) hallucinations in schizophrenia, which is an alternative to the conventional explanation of the forward model. This study aimed to test one component of the hypothesis, termed the rest-stimulus interaction, using electroencephalography. Using schizotypy as a proxy for schizophrenia, 28 psychology students were recruited into high/low schizotypy groups. Event-related potentials (ERP) were recorded under two passive auditory conditions that specifically excluded the motor component associated with speaking in real time and that is intrinsic to the forward model. ERP peaks N 1 and P2 were analysed using a hierarchical regression approach, with schizotypy and hallucination experience separately tested as predictors and controlling for depression, anxiety, and stress. Schizotypy was associated with a difference in the amplitude of the initial attentional response (represented by N 1) between the two conditions, but in the opposite direction to that predicted. This finding suggests that there may be an alternative mechanism to both the resting state hypothesis and the forward model. However, as expected, both schizotypy and hallucination experience predicted a difference in forward processing (represented by P2 amplitude) between the conditions. This finding supports the resting state hypothesis. These results provide initial support for the rest-stimulus interaction and present some challenge to the forward model. Future research needs to replicate these findings in a clinical population and include measurement of resting brain activity.