Price expectations, disequilibrium adjustments, and macroeconomic price stability
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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 !