Modelling Expectations Formation with Measurement Errors

This paper provides a model of expectations formation with a relatively general linear structure from which various standard models emerge as special cases. By concentrating on agents' information acquisition rather than on their parameter estimation, the author obtains a rational forecasting model which is consistent with a wider variety of responses to new information than are most commonly-used hypotheses. After describing the structure of the model, several potential extensions and the conditions under which standard hypotheses emerge, he considers testable restrictions on the general model which lead to some simplification while continuing to allow more general responses of expectations to information. Copyright 1988 by Royal Economic Society.

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