Necessary Condition for Rationality and Adaptive Expectations Schemes
7 Pages Posted: 26 Feb 2014
Date Written: February 24, 2014
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
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