Abstract
The cobweb theorem purports to explain persistent fluctuations of prices in selected agricultural markets. It was first developed in the 1930s under static price expectations where the predicted price equalled actual price in the last period. Muth’s rational expectations hypothesis posited that forecast errors will not be serially correlated and the pattern of past forecast errors cannot be used to improve the accuracy of the forecasts. The fundamental question of whether observed price cycles are better explained by systematic errors in price forecasts or by the cumulative impact of unpredictable shocks has not as yet been definitively addressed.
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Pashigian, B.P. (2018). Cobweb Theorem. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_600
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DOI: https://doi.org/10.1057/978-1-349-95189-5_600
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