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By K. Holden

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Extra resources for Expectations: Theory and Evidence

Sample text

Since the Sargent-Wallace paper much research has shown that their result for stabilisation policy must be regarded as a very special case. In the context of models embodying a Sargent-Wallace supply curve, Turnovsky (1980) and Weiss (1980) have shown that if there are any information asymmetries between public and private agents then systematic monetary stabilisation policy will alter the variance of output. Of course, there is no reason why a model in which agents form their expectations rationally should be typified by a Sargent-Wallace supply curve.

3 the effects of having incomplete current information were considered. As well as affecting the solution it affects the serial- Appendices 51 correlation properties of ex post forecast errors. Serial correlation will occur up to a level which reflects the forecast horizon - 1 plus the lag on global information. Only in the special case of a one-period ahead forecast with full current information will the forecast error have no serial correlation. 4, we found that rational expectations per se do not render monetary policy impotent.

In general, when a model contains expectations of the future value of a variable (rather than the current value) there is no unique solution. However, a unique solution can be obtained by imposing additional criteria such as stability, minimum variance or terminal conditions. 3 the effects of having incomplete current information were considered. As well as affecting the solution it affects the serial- Appendices 51 correlation properties of ex post forecast errors. Serial correlation will occur up to a level which reflects the forecast horizon - 1 plus the lag on global information.

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