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Jul 19, 2024
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[cagan_adaptive] update suggestions #516

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[cagan_adaptive] update suggestions
longye-tian Jul 19, 2024
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Update cagan_adaptive.md
longye-tian Jul 19, 2024
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4 changes: 2 additions & 2 deletions lectures/cagan_adaptive.md
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Expand Up @@ -62,7 +62,7 @@ $$ (eq:caganmd_ad)


This equation asserts that the demand for real balances
is inversely related to the public's expected rate of inflation.
is inversely related to the public's expected rate of inflation with sensitivity $\alpha$.

Equating the logarithm $m_t^d$ of the demand for money to the logarithm $m_t$ of the supply of money in equation {eq}`eq:caganmd_ad` and solving for the logarithm $p_t$
of the price level gives
Expand All @@ -79,7 +79,7 @@ $$
$$ (eq:eqpipi)

We assume that the expected rate of inflation $\pi_t^*$ is governed
by the following adaptive expectations scheme proposed by {cite}`Friedman1956` and {cite}`Cagan`:
by the following adaptive expectations scheme proposed by {cite}`Friedman1956` and {cite}`Cagan`, where $\lambda\in [0,1]$ denotes the weight on expected inflation.

$$
\pi_{t+1}^* = \lambda \pi_t^* + (1 -\lambda) \pi_t
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