A Reexamination of the Adaptive Expectations Hypothesis When Applied to a Cobweb Model.

摘要

This note points out a certain type of inconsistency which appears when the familiar adaptive expectations hypothesis is applied to the supply equation of a basic cobweb model with a simple error structure. It is shown that there is a difference between the minimum mean square error forecast function of the price (when the price is viewed as a stationary time series process) and the implicit assumption of the adaptive expectations hypothesis. The inconsistency disappears when a certain condition is satisfied by the model parameters. Thus, for a cobweb model with an error structure, the parameter space in which the adaptive expectations hypothesis is meaningful is diminished.