A note on distributed lags, prediction, and signal extraction

Abstract

A wide variety of economic models include as explanatory variables either expectational variables or variables representing the result of some decision-making process. The first category includes both expectations about the future values of variables, e.g., next period's sales, the level of unemployment two quarters ahead, etc. and other subjective variables such as permanent income or the "normal" level of prices and interest rates. Examples of the second type are "desired" capital stock, planned production, or inventory accumulation, and so on.