Probleme |. In Secon 7. we tated tat Cag’ econometric nite of a xogencty of mi In doing this, You tay (unesitaly) sesame tional formula. was oot adaptive expecations, but instead Tl, = 2. Inigo on alate aa a Which te demand and soph sup bgt + deo. expectations are formed according 10 pf =p. Under what cond ‘Suppose that Cagan had sssumed that expectations were described by = ays tat he expt ale f py has eg tbe ‘aad to dyeamic ab References” "Gunsy Theory of one). Bos Petar heaps nea of ‘ow henaon! Econ Re 8 (een 9) 54 Rational Expectations 8.1 Basie Properties ste conto thse who make thems pepo sens wl to fot ‘pectin ina manner tat elas svoidole res, Fach ‘eran eorons—areavwable:by seeing the prt cond ons that eat rs, agent ca ke seon oe stoma tendeney t rr An atvactve typo for coon sales of ‘Seeger enor, comeaueth tha age a mee ‘nage the as itch 9ay tat ee ney ee vege But how ihe sche of sent itiel ctccortta cnc eae Seger etter egereace pare ‘would avoid errors in the pariclar ce of escrineahsaye some inftion pth ht will make sytem erent from Spe (ee atemstealy in ere) "The mesg ofthe frets tha 0 exes natal the ypohes that agers wold tema expectation errs, me Want not formas but imsead an aonytie conn tht ran out Sach ‘rom Toaze nat the appropite condom et ws emit 3b Sent forming her expcaton Ue tof fny—-net Pio’ op) oe level-an let's denote tat expection y Phe Then tie petra oro tat wil csr when erode opt, Pr Pit And the condom that me went to adopt shat trot Bink blscaotbe senate ented aay formation ome {ith get in prod (bon te expectation was formed) "Toe way to ae ns condition, uns ot fo ase dat expects sabe) eld (bleed) by agents ave equal to {ie mean of be fbaby lon othe arte ing fee, [Been stale tlormaton. For etampl, yy 8 rom the Vaage ft of prod erandors abe een rm tt vintage pan = ‘sf, tbe mathematical expeaation es mena) ol he proba ‘bol denote the 2 ofan sveable ote ape at tine ‘eth esta hype cr sing ca De ged Bly = BP. o In woes, his onion egies he! the abjcve expectation (oe {st pro eb gets ane equal the bee (atest) ‘Hpeciod of py sndnal on (ves the mean othe etal ‘onstonal probity dtoton af seem sfoomationsvalable an Bat where, the cede ay wll sky does te aoa! probatity tition f fos some from? In ier sense. of couse trtnown, But {econonan via washes 0 te this expectations pit othe coment of node barn he coure of carting Thee wnode ops bi own sew of how ps ual senrted. Ths the ony oly bern way fr hf posed 4 ete prod ‘Sompting Etp.2) is model i hs view ofthe actual economy "To inspite segue nvr of av expcaonal bypass that le ou tema tro an hae sere that contin (1) el tdoso Less tow prove atthe aserion ru Fw we cals Feodeit() feted. Tp do that, we td he mean of he dst Hom fos petals That's we compute Ee, ~ le) = Elis ~ Een = Bl) ~ LEP NT = Beer) ~ Elo) = . sowing tat the average errr i 0. Ln ts clean the nt ieky ep the aot one, where the fata ELEC) ‘husk Ely) waned Te vay of at net ich Spec ase ot the tau of rtd expectations" cemoestatd in he append to ths chapter, Thr “laws reo the commonsense dentate er fection ofan expectton that wl be Sued on mre slots Sr carey Se wl py bee agton shen he "Thor me se ht the ere expecitiona or under hypothesis (a) wl bea To complete the Semonsraion tt hee wel be 20 inlet, cenote any vara os aie known tages at. Thus Pian cheno 0, Thon cone the sovarane fp =P and Since Etprs = py) nse ths covarance il be the meant he nsinion of he pede (py =F We eva sco Ele: ~ ra = Ep ~ le 0))8) Elgon) ~ AE ra.) Bt neaase 4 an element of tue that (oO) = Etsiety. fon wang te am of ered expertion “we ae ‘hath term in G}eqube Ep) Tht shows ten hte ° Flos = pada =o o “hime hat he expectation ers aa stati seese, ure ‘Mea any elomen off ie toany vale norman) Tar we five owe hat he spon of ump (wl a fi at "Thm concunioe aocrds mel i might beaded, withthe common sete en ta te “be rea frat ele y andorarable js the mean ofthe probably dscbution ofthat rad ‘rable "The teky sect of cur caren pletion i thatthe ‘clevan bron ie 5 condos! disition-vone tht rele The hyoitesis concerning expectations that we fave outlined was fit pt fr by Jobe Math 0) Beas hep of expcta ‘Sn benaor poste sparen an the absence of seSabe ‘rors acest for otal onthe prof toe agents in he mod ‘ed economy, Math cone the tr radon expects fo dessibe bbe typoteat As it happens, Mats teas were nt inet tory th som con, prt ee pet ‘The protesion's pprestionol te hcory was rest endanced ithe ‘airy anor opting ope Robe na tpled to unportatisser ta masoecnomice, ‘These paper be ‘eb cllecvelyrepaahed in Lacs 0), Watings by Poors 1 Sper (1073) and Robes. Baro (197 were ako portant veloping the meses suppor fatal spetton at xs 182 Application to the Cagan Mod ‘We fave conned that agents wl be forming expectations in 2 ‘a amr hye, saci apaon ec Hstte the use of ths apres by sing amie exp, the (Capi mode! of infistion, unde he espn at expects tt “Themainingredientof the Cagaa modelistbe demandfunctonforreal repeetiey ube yandesrepuramcter, The socasie duran, ‘sasumecto purely random thitis,obe rawninerhperodom =n Unchanging dnbaionwkimeansea advantage Ate do tonisatenchdate urate previon crowing ule fesse foreltn ASaconenen abtevatonforihpeeaton whch nil bese equemly we say toni white mse duran, ‘In(), dp, cons the subject expectation fe a eso of spy thon at twa. To mp trator pte, = Bap), © Ina tap led mony wie Ee Svar tesone aE ft emanates Eien tional openness npeed esse ‘Shosethrootabon owe an waters pee rae o Epes aise ts Ime Bom 9 aEs — D+ a ‘Desig when (8), me mph yo develops oluton orp inthe foletng way Fr the tesa pan be coed To Be m= y+ abBa + (a ° he the ler an be rearranged thu: pn T= po = fa