Necessary Condition for Rationality and Adaptive Expectations Schemes

7 Pages Posted: 26 Feb 2014

See all articles by Mauro Gallegati

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Antonio Palestrini

Università Politecnica delle Marche

Date Written: February 24, 2014

Abstract

There are situations in which the old-fashioned adaptive expectation process seems to provide a good description of agents’ behavior (Chow, 2011). Unfortunately, this expectation scheme may not satisfy the necessary rationality condition (unconditional mean-zero error). This paper shows how to fix the problem introducing an error correction term.

Keywords: Adaptive expectations, non-stationary variables

Suggested Citation

Gallegati, Mauro and Palestrini, Antonio, Necessary Condition for Rationality and Adaptive Expectations Schemes (February 24, 2014). Available at SSRN: https://ssrn.com/abstract=2400497 or http://dx.doi.org/10.2139/ssrn.2400497

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

Antonio Palestrini (Contact Author)

Università Politecnica delle Marche ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

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