Rethinking Expectations: The Way Forward for Macroeconomics

Overview

"The 1970 Phelps volume has been extremely influential in macroeconomics. Three of its contributors went on to win Nobel prizes for work detailed in the book, and it inspired many others who contributed to the small equilibrium models that became the workhorses of macroeconomics. Yet virtually all of these models use the assumption of rational expectations. In this new volume, Phelps and Roman Frydman assemble a new group of scholars to critique the work based on rational expectations. Phelps and Frydman argue that rational expectations destroyed ...

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Overview

"The 1970 Phelps volume has been extremely influential in macroeconomics. Three of its contributors went on to win Nobel prizes for work detailed in the book, and it inspired many others who contributed to the small equilibrium models that became the workhorses of macroeconomics. Yet virtually all of these models use the assumption of rational expectations. In this new volume, Phelps and Roman Frydman assemble a new group of scholars to critique the work based on rational expectations. Phelps and Frydman argue that rational expectations destroyed one of the key premises of the original book--that independent expectations are critical for understanding macroeconomic phenomena. The contributors to this follow-up volume make a convincing case for the failure of several models with rational expectations, and present thought-provoking alternatives. Their efforts to build macroeconomic models without the rational expectations hypothesis might have the impact in their areas of research that the original volume had."--Christopher Pissarides, Nobel Laureate in Economics

"Microeconomic Foundations of Employment and Inflation Theory, edited by Edmund Phelps forty years ago, established the concept of 'micro foundations' as an essential macroeconomics idea. Later, 'rational expectations' was added as the second pillar of the current standard macro model. Recent events have challenged the validity of that model. This new Phelps volume, coedited with Roman Frydman, challenges and offers alternatives to the second pillar while retaining the first. It is a must-read for anyone interested in modern economic thought and its implications for policy."--Dale Mortsensen, Nobel Laureate in Economics

"A great volume."--Peter Howitt, Brown University

"This book brings together an exceptional group of economic theorists who discuss future avenues that the economics profession can take to replace the paradigm of rational expectations. The task is challenging and the outcome of the project still uncertain, but all the chapters are very interesting."--Fabrizio Coricelli, Paris School of Economics

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Product Details

  • ISBN-13: 9780691155234
  • Publisher: Princeton University Press
  • Publication date: 1/22/2013
  • Pages: 440
  • Sales rank: 1,014,897
  • 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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