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Michael Woodford - One of the best experts on this subject based on the ideXlab platform.
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macroeconomic analysis without the Rational Expectations hypothesis
Annual Review of Economics, 2013Co-Authors: Michael WoodfordAbstract:The article presents a temporary equilibrium framework for macroeconomic analysis that allows for a wide range of possible specifications of Expectations but reduces to a standard new Keynesian model in the limiting case of Rational Expectations. This common framework is then used to contrast the assumptions and implications of several different ways of relaxing the assumption of Rational Expectations. As an illustration of the method, the implications of alternative assumptions for the selection of a monetary policy rule are discussed. Other issues treated include the conditions required for Ricardian equivalence and for existence of a deflation trap.
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macroeconomic analysis without the Rational Expectations hypothesis
National Bureau of Economic Research, 2013Co-Authors: Michael WoodfordAbstract:This paper reviews a variety of alternative approaches to the specification of the Expectations of economic decisionmakers in dynamic models, and reconsiders familiar results in the theory of monetary and fiscal policy when one allows for departures from the hypothesis of Rational Expectations. The various approaches are all illustrated in the context of a common model, a log-linearized New Keynesian model in which both households and firms solve infinite-horizon decision problems; under the hypothesis of Rational Expectations, the model reduces to the standard "3-equation model" used in studies such as Clarida et al. (1999). The alternative approaches considered include Rationalizable equilibrium dynamics (Guesnerie, 2008); restricted perceptions equilibria (Branch, 2004); decreasing-gain and constant-gain variants of least-squares learning dynamics (Evans and Honkapohja, 2001); Rational belief equilibria (Kurz, 2012); and near-Rational Expectations equilibria (Woodford, 2010). Issues treated include Ricardian equivalence; the determinacy of equilibrium under alternative interest-rate rules; non-fundamental sources of aggregate instability; the trade-off between inflation stabilization and output-gap stabilization; and the possibility of a "deflation trap."
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macroeconomic analysis without the Rational Expectations hypothesis
National Bureau of Economic Research, 2013Co-Authors: Michael WoodfordAbstract:This paper reviews a variety of alternative approaches to the specification of the Expectations of economic decisionmakers in dynamic models, and reconsiders familiar results in the theory of monetary and fiscal policy when one allows for departures from the hypothesis of Rational Expectations. The various approaches are all illustrated in the context of a common model, a log-linearized New Keynesian model in which both households and firms solve infinite-horizon decision problems; under the hypothesis of Rational Expectations, the model reduces to the standard "3-equation model" used in studies such as Clarida et al. (1999). The alternative approaches considered include Rationalizable equilibrium dynamics (Guesnerie, 2008); restricted perceptions equilibria (Branch, 2004); decreasing-gain and constant-gain variants of least-squares learning dynamics (Evans and Honkapohja, 2001); Rational belief equilibria (Kurz, 2012); and near-Rational Expectations equilibria (Woodford, 2010). Issues treated include Ricardian equivalence; the determinacy of equilibrium under alternative interest-rate rules; non-fundamental sources of aggregate instability; the trade-off between inflation stabilization and output-gap stabilization; and the possibility of a "deflation trap."
Jamsheed Shorish - One of the best experts on this subject based on the ideXlab platform.
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Functional Rational Expectations equilibria in market games
Economic Theory, 2010Co-Authors: Jamsheed ShorishAbstract:The Rational Expectations equilibrium (REE) has been criticized as an equilibrium concept in market game environments. Such an equilibrium may not exist generically, or it may introduce unrealistic assumptions about an economic agent’s knowledge or computational ability. We define an REE as a probability measure over uncertain states of nature which exploits all available information in a market game, and which exists for almost all economies. Furthermore, if retrading is allowed, it is possible for agents to compute such a ‘functional Rational Expectations equilibrium’ using straightforward numerical fixed point algorithms. The approach is demonstrated in a detailed numerical example.
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Functional Rational Expectations Equilibria in Market Games
Economics Series, 2006Co-Authors: Jamsheed ShorishAbstract:The Rational Expectations equilibrium has been criticized as an equilibrium concept in market game environments. Such an equilibrium may not exist generically, or it may introduce unrealistic assumptions about an economic agent's knowledge or computational ability. We define a Rational Expectations equilibrium as a probability measure over uncertain states of nature which exploits all available information in a market game, and which exists for almost all economies. Furthermore, if retrading is allowed, it is possible for agents to compute such a 'functional Rational Expectations equilibrium' using straightforward numerical fixed point algorithms.
Nicholas C. Yannelis - One of the best experts on this subject based on the ideXlab platform.
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A new perspective to Rational Expectations: maximin Rational Expectations equilibrium ⁄
2011Co-Authors: Luciano De Castro, Marialaura Pesce, Nicholas C. YannelisAbstract:We introduce a new notion of Rational Expectations equilibrium (REE) called maximin Rational Expectations equilibrium (MREE), which is based on the maximin expected utility (MEU) formulation. In particular, agents maximize maximin expected utility conditioned on their own private information and the information that the equi- librium prices generate. Maximin equilibrium allocations need not to be measurable with respect to the private information of each individual and with respect to the information that the equilibrium prices generate, as it is in the case of the Bayesian REE. We prove that a maximin REE exists universally (and not generically as in Radner (1979) and Allen (1981)), it is e-cient and incentive compatible. These results are false for the Bayesian REE.
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On non-revealing Rational Expectations equilibrium
Economic Theory, 2008Co-Authors: Dionysius Glycopantis, Allan Muir, Nicholas C. YannelisAbstract:It is shown that a non-revealing Rational Expectations equilibrium may not be coalitionally Bayesian incentive compatible, may not be implementable as a perfect Bayesian equilibrium and may not belong to the weak fine core and thus may not be fully Pareto optimal. These negative results lead us to conclude the non-revealing Rational Expectations equilibrium is not a sensible solution concept.
Thomas J. Sargent - One of the best experts on this subject based on the ideXlab platform.
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Rational Expectations and Inflation
Princeton University Press, 2017Co-Authors: Thomas J. SargentAbstract:This collection of essays uses the lens of Rational Expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which the author was awarded the 2011 Nobel Prize in economics. Rational Expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. This book engages with practical problems in economics in a less formal, noneconometric way, demonstrating how Rational Expectations can satisfactorily interpret a range of historical and contemporary events. It focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, the book finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated. This fully expanded edition includes the author's 2011 Nobel lecture, “United States Then, Europe Now.” It also features new articles on the macroeconomics of the French Revolution and government budget deficits.
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Rational Expectations and the Reconstruction of Macroeconomics
Princeton University Press, 2017Co-Authors: Thomas J. SargentAbstract:This chapter discusses the Rational Expectations reconstruction of macroeconomics. In particular, it examines how the hypothesis of Rational Expectations has been used to develop econometric models that take into account that people's behavior patterns will vary systematically with changes in government policies—the rules of the game. The chapter looks at two examples that illustrate the general presumption that the systematic behavior of private agents and the random behavior of market outcomes both will change whenever agents' constraints change, as when government policy or other parts of the environment change. The first example deals with investment decision, and the second concerns the inflationary effects of government deficits. The chapter also considers the implications of the Rational Expectations approach for the ways in which policymakers and their advisers think about the choices confronting them.
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Rational Expectations and Inflation: Third Edition
2013Co-Authors: Thomas J. SargentAbstract:This collection of essays uses the lens of Rational Expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which Thomas Sargent was awarded the 2011 Nobel Prize in economics. Rational Expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. Here, Sargent engages with practical problems in economics in a less formal, noneconometric way, demonstrating how Rational Expectations can satisfactorily interpret a range of historical and contemporary events. He focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, Sargent finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated. This fully expanded edition of Rational Expectations and Inflation includes Sargent's 2011 Nobel lecture, "United States Then, Europe Now." It also features new articles on the macroeconomics of the French Revolution and government budget deficits.
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Rational Expectations and Inflation Ed. 3
2013Co-Authors: Thomas J. SargentAbstract:This collection of essays uses the lens of Rational Expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which Thomas Sargent was awarded the 2011 Nobel Prize in economics. Rational Expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. Here, Sargent engages with practical problems in economics in a less formal, noneconometric way, demonstrating how Rational Expectations can satisfactorily interpret a range of historical and contemporary events. He focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, Sargent finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated. This fully expanded edition of Rational Expectations and Inflation includes Sargent's 2011 Nobel lecture, "United States Then, Europe Now." It also features new articles on the macroeconomics of the French Revolution and government budget deficits.
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Rational Expectations Econometrics
1991Co-Authors: Lars Peter Hansen, Thomas J. SargentAbstract:Exact linear Rational Expectations models identification of continuous time Rational Expectations models from discrete time data two difficulties with interpreting vector auto-regressions.
Filippo Cesarano - One of the best experts on this subject based on the ideXlab platform.
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The Rational Expectations Hypothesis in Retrospect
The American Economic Review, 2016Co-Authors: Filippo CesaranoAbstract:The Rational Expectations hypothesis is at the center of current debates in economic theory. The importance of this theoretical innovation has stimulated a number of studies, including analyses in the unfashionable field of the history of thought, the 1979 article by Brian Kantor being a first example. Historical investigations on the subject of Rational Expectations are of interest since it is held that this theory has revived the teachings of the classics, inasmuch as it provides the cornerstone of the recently developed approach known as "new classical macroeconomics." The present note examines some specific aspects, as yet Pot emphasized in the literature, concerning the relationship between Rational Expectations and classical monetary theory. In particular, the following results will be shown: the fundamental implication of the Rational Expectations hypothesis, that is, that only unexpected changes in the money stock influence the real sector of the economy, is a basic tenet of classical monetary theory as well and is founded upon the very argument according to which agents efficiently use the available information in order to take account of the consequences of policy measures (Section I). This common analytical framework notwithstanding, classical analysis of the role to be assigned to the monetary authority reflects a different appraisal of the dimension of the information set (Section II).