ARIMA models of the price level: An assessment of the multilevel adaptive learning process in the USA

This paper estimates the ARIMA processes for the observed and expected price level corresponding to the three‐level adaptive expectations model proposed by Jacobs and Jones (1980). These univariate processes are then compared with the best‐fit ARIMA model. The results indicate that the best‐fit model for the observed price level is a restricted version of the two‐level adaptive learning process specified in terms of prices, suggesting a simple adaptive rule in the inflation rate. A comparison of the time‐series forecasts from the best‐fit model with the mean responses to the ASA‐NBER survey shows no significant difference in their accuracy. The time‐series forecasts are, however, conditionally efficient. The best‐fit ARIMA model for expected prices measured by the ASA‐NBER consensus forecasts does not correspond to any version of the Jacobs and Jones model.