## Info

21,901

23,191

Notes: PPCE = per capita personal consumption expenditure, in 1996 dollars.

PPDI = per capita personal disposable income, in 1996 dollars. Source: Economic Report of the President, 2001, Table B-31, p. 311.

Gujarati: Basic I III. Topics in Econometrics I 17. Dynamic Econometric I I © The McGraw-Hill

Econometrics, Fourth Models: Autoregressive Companies, 2004 Edition and Distributed-Lag

Models

670 PART THREE: TOPICS IN ECONOMETRICS

17.5 RATIONALIZATION OF THE KOYCK MODEL: THE ADAPTIVE EXPECTATIONS MODEL

Although very neat, the Koyck model (17.4.7) is ad hoc since it was obtained by a purely algebraic process; it is devoid of any theoretical underpinning. But this gap can be filled if we start from a different perspective. Suppose we postulate the following model:

where Y = demand for money (real cash balances)

X ~ = equilibrium, optimum, expected long-run or normal rate of interest u = error term

Equation (17.5.1) postulates that the demand for money is a function of expected (in the sense of anticipation) rate of interest.

Since the expectational variable X~ is not directly observable, let us propose the following hypothesis about how expectations are formed:

Was this article helpful?

Learning About The Rules Of The Rich And Wealthy Can Have Amazing Benefits For Your Life And Success. Discover the hidden rules and beat the rich at their own game. The general population has a love / hate kinship with riches. They resent those who have it, but spend their total lives attempting to get it for themselves. The reason an immense majority of individuals never accumulate a substantial savings is because they don't comprehend the nature of money or how it works.

Get My Free Ebook

## Post a comment