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Usefulness of Adaptive and Rational Expectations in Economics

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  • Gregory C. Chow

    (Princeton University)

Abstract

This paper provides a statistical reason and strong econometric evidence for supporting the adaptive expectations hypothesis in economics. It points out why the rational expectations hypothesis was embraced by the economics profession without sufficient evidence. Finally it will summarize the conditions under which these two competing hypotheses can be used effectively.

Suggested Citation

  • Gregory C. Chow, 2011. "Usefulness of Adaptive and Rational Expectations in Economics," Working Papers 1334, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:221
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    File URL: https://gceps.princeton.edu/wp-content/uploads/2017/01/221chow.pdf
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    References listed on IDEAS

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    1. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, June.
    2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
    2. Makrelov, Konstantin & Arndt, Channing & Davies, Rob & Harris, Laurence, 2020. "Balance sheet changes and the impact of financial sector risk-taking on fiscal multipliers," Economic Modelling, Elsevier, vol. 87(C), pages 322-343.
    3. Dima, Bogdan & Dima, Ştefana Maria & Ioan, Roxana, 2025. "The short-run impact of investor expectations’ past volatility on current predictions: The case of VIX," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 98(C).
    4. Stefanescu, Razvan & Dumitriu, Ramona, 2016. "Particularitǎţi ale evoluţiei variabilelor financiare [Some particularities of the financial variables evolution]," MPRA Paper 73481, University Library of Munich, Germany, revised 02 Sep 2016.
    5. Inoua, Sabiou M. & Smith, Vernon L., 2023. "A classical model of speculative asset price dynamics," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    6. Antonio Palestrini & Mauro Gallegati, 2015. "Unbiased Adaptive Expectation Schemes," Economics Bulletin, AccessEcon, vol. 35(2), pages 1185-1190.
    7. Emilian DOBRESCU, 2020. "Self-fulfillment degree of economic expectations within an integrated space: The European Union case study," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-32, December.
    8. Annarita COLASANTE & Antonio PALESTRINI & Alberto RUSSO & Mauro GALLEGATI, 2015. "Adaptive Expectations with Correction Bias: Evidence from the lab," Working Papers 409, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    9. Colasante, Annarita & Palestrini, Antonio & Russo, Alberto & Gallegati, Mauro, 2017. "Adaptive expectations versus rational expectations: Evidence from the lab," International Journal of Forecasting, Elsevier, vol. 33(4), pages 988-1006.
    10. Ha, Chang Yong & Im, Hyun Joong & Kang, Ya, 2017. "Sticky dividends: A new explanation," Finance Research Letters, Elsevier, vol. 23(C), pages 69-79.
    11. Otunuga Olusegun M. & Ladde Gangaram S. & Ladde Nathan G., 2019. "Local Lagged Adapted Generalized Method of Moments: An Innovative Estimation and Forecasting Approach and its Applications," Journal of Time Series Econometrics, De Gruyter, vol. 11(1), pages 1-72, January.
    12. Blasques, Francisco & Bräuning, Falk & Lelyveld, Iman van, 2018. "A dynamic network model of the unsecured interbank lending market," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 310-342.
    13. Podshivalov, Georgii, 2019. "Observing the Evolution in Macroeconomic Theory," MPRA Paper 97657, University Library of Munich, Germany.
    14. Shulu Che & Ronald Ravinesh Kumar & Peter J. Stauvermann, 2021. "Taxation of Land and Economic Growth," Economies, MDPI, vol. 9(2), pages 1-20, April.
    15. Biswajit Maitra, 2016. "Monetary, Real Shocks And Exchange Rate Variations In India," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 41(1), pages 81-103, March.

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    More about this item

    Keywords

    macroeconomics; adaptive expectations; rational expectations;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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