Full text: Study week on the econometric approach to development planning

+ >SION 
As always, Professor WoLb has given us an interesting paper 
My remarks are in the nature of supplements. 
In the first place, I am interested in the case of bi-expecta- 
tional interdependent systems. As Professor Worp has shown, in 
this case the elasticity of demand for example becomes elasticity 
in terms of expected rather than actual price, where expected is 
interpreted as the expected value of price given by the reduced 
form equations. Now there is of course another sense of expectation 
in economics; that is the sense in which a variable is expected by 
people who make a decision based on it. An interesting question, it 
seems to me, is under what circumstances and in what types of 
models this will in fact be the same as the expected price given 
from the reduced form. Only in such circumstances will it be the 
case that elasticity with respect to expected price in fact is a mean- 
ingful parameter which describes interesting behavior. I suspect 
that the two coincide in a rather general framework. There is in 
the literature a hypothesis known as the rational expectations hypo- 
thesis due largely to JouN MurtH, according to which it is assumed 
that the decision makers who are being studied expect the values 
of the relevant variables to be those on the average which will be 
predicted by the model. MuTH has shown that this is not logically 
circular, Further, in this context it sounds like the sort of behavior 
which would lead decision makers to expect that price predicted by 
the reduced form 
Wold - pag. 53

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