Abstract:
In two previous papers we have discussed the formulation of a logically
consistent adaptive-type price expectations mechanism in continuous time
and have applied our results to derive sufficient conditions for dynamic price
stability in a variety of economic models (Burmeister and Turnovsky [5, 2033.
In all cases the sufficient conditions for stability entail a “slow” rate of
adaptation which implies a consistent error in the direction of the forecasted
versus actual price movements. This is a highly undesirable feature since one
cannot realistically expect economic agents to persistently predict in the
wrong direction !
