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:

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