Degree Name

Master of Arts (MA)

Semester of Degree Completion

1998

Thesis Director

Noel Brodsky

Abstract

Expectations play an important role in economics. Traditionally two major branches of expectation theory are distinguished: that of adaptive and rational expectations. This study sets out the goal of investigating inflationary expectations based on real world experiences. The model proposed and tested here abandons the traditional fixed-time-interval-update models for a non-fixed-time-interval-update model. Although the penalty function attached to each error is still subject to debate, it is shown that by reacting with faster updates to errors in expectations economic agents achieve more precise expectations compared to those of a fix time interval update model. We also find the model rational in the weak sense, but we are unable to test the proposed model for strong rationality as of this moment, due to the lack of appropriate econometric tests for non-fixed time interval processes.

The study concludes that time variant adaptive expectations can be regarded as rational in the weak sense, and at the limit they appear to be mathematically identical.

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