Rethinking Expectations: The Way Forward for Macroeconomics

Overview

This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark "Phelps volume," Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, in their provocative introductory essay, Roman Frydman and Edmund Phelps argue that the vast majority of macroeconomic and finance models developed over the last four decades derailed, rather than built on, the ...

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Overview

This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark "Phelps volume," Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, in their provocative introductory essay, Roman Frydman and Edmund Phelps argue that the vast majority of macroeconomic and finance models developed over the last four decades derailed, rather than built on, the Phelps volume's "microfoundations" approach. Whereas the contributors to the 1970 volume recognized the fundamental importance of according market participants' expectations an autonomous role, contemporary models rely on the rational expectations hypothesis (REH), which rules out such a role by design.

The financial crisis that began in 2007, preceded by a spectacular boom and bust in asset prices that REH models implied could never happen, has spurred a quest for fresh approaches to macroeconomic analysis. While the alternatives to REH presented in Rethinking Expectations differ from the approach taken in the original Phelps volume, they are notable for returning to its major theme: understanding aggregate outcomes requires according expectations an autonomous role. In the introductory essay, Frydman and Phelps interpret the various efforts to reconstruct the field--some of which promise to chart its direction for decades to come.

The contributors include Philippe Aghion, Sheila Dow, George W. Evans, Roger E. A. Farmer, Roman Frydman, Michael D. Goldberg, Roger Guesnerie, Seppo Honkapohja, Katarina Juselius, Enisse Kharroubi, Blake LeBaron, Edmund S. Phelps, John B. Taylor, Michael Woodford, and Gylfi Zoega.

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Product Details

  • ISBN-13: 9780691155234
  • Publisher: Princeton University Press
  • Publication date: 1/22/2013
  • Pages: 440
  • Sales rank: 965,654
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.50 (d)

Meet the Author


Roman Frydman is professor of economics at New York University and the coauthor (with Michael D. Goldberg) of "Beyond Mechanical Markets" and "Imperfect Knowledge Economics". Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, is director of Columbia University's Center on Capitalism and Society. His many books include "Structural Slumps" and "Seven Schools of Macroeconomic Thought".
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Table of Contents


Which Way Forward for Macroeconomics and Policy Analysis? 1
Roman Frydman and Edmund S. Phelps
PART ONE Back to the Foundations
1 Expectational Coordination Failures and Market Volatility 49
Roger Guesnerie
2 Learning as a Rational Foundation for Macroeconomics and Finance 68
George W. Evans and Seppo Honkapohja
3 Keynes on Knowledge, Expectations, and Rationality 112
Sheila Dow
4 The Imperfect Knowledge Imperative in Modern Macroeconomics and Finance Theory 130
Roman Frydman and Michael D. Goldberg
PART TWO Autonomous Expectations in Long Swings in Asset Prices
5 Heterogeneous Gain Learning and Long Swings in Asset Prices 169
Blake LeBaron
6 Opening Models of Asset Prices and Risk to Nonroutine Change 207
Roman Frydman and Michael D. Goldberg
PART THREE Rethinking Unemployment-Inflation Trade-offs and the Natural Rate Theory
7 Animal Spirits, Persistent Unemployment, and the Belief Function 251
Roger E. A. Farmer
8 Indeterminacies in Wage and Asset Price Expectations 277
Edmund S. Phelps
9 The Long Swings of Employment, Investment, and Asset Prices 301
Gylfi Zoega
10 Imperfect Knowledge, Asset Price Swings, and Structural Slumps 328
Katarina Juselius
11 Stabilization Policies and Economic Growth 351
Philippe Aghion and Enisse Kharroubi
PART FOUR Policymaking after "Rational Expectations"
12 Swings and the Rules-Discretion Balance 373
John B. Taylor
13 Principled Policymaking in an Uncertain World 389
Michael Woodford
Contributors 415
Index 421
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