scholarly journals Which Way Forward for Macroeconomics and Policy Analysis?

2013 ◽  
Author(s):  
Roman Frydman ◽  
Edmund S. Phelps
Keyword(s):  
Economic Analysis ◽  
Policy Analysis ◽  
Asset Prices ◽  
Rational Expectations ◽  
Market Volatility ◽  
Natural Rate ◽  
Expectations Hypothesis ◽  
Natural Rate Of Unemployment ◽  
Imperfect Knowledge

This introductory chapter discusses the papers presented at the Center on Capitalism and Society conference held in the fall of 2010. The conference, which commemorated the fortieth anniversary of the Phelps microfoundations volume, featured researchers engaged in developing alternatives to the Rational Expectations Hypothesis (REH). The Phelps volume provided radically new accounts of the comovements of macroeconomic aggregates, including inflation and unemployment, while casting serious doubt on the validity of policy analysis based on then-popular Keynesian macroeconometric models. This chapter considers the various efforts to reinvent macroeconomics that were discussed at the Phelps conference, with a particular focus on non-REH alternatives and their implications for economic analysis. Topics include nonroutine change and imperfect knowledge, expectational coordination and market volatility, autonomous expectations in long swings in asset prices, and the natural rate of unemployment.

Imperfect Knowledge, Asset Price Swings, and Structural Slumps

2013 ◽  
Author(s):  
Katarina Juselius
Keyword(s):  
Interest Rates ◽  
Foreign Currency ◽  
Asset Price ◽  
Real Economy ◽  
Currency Markets ◽  
Natural Rate ◽  
Expectations Hypothesis ◽  
Vector Autoregressive ◽  
Natural Rate Of Unemployment ◽  
Imperfect Knowledge

This chapter examines the relationship between speculation in the currency markets and aggregate activity in the real economy by drawing on the Structural Slumps theory and the theory of Imperfect Knowledge Economics (IKE). It first considers exchange rate determination in two models, one based on the Rational Expectations Hypothesis (REH) and the other on the theory of IKE, before discussing some general principles for how to structure the observed persistence in the data, and how these principles can be used in the cointegrated vector autoregressive model. The chapter also explains how foreign currency speculation under IKE interacts with a customer market economy where profit shares are adjusting to fluctuations in real exchange rates and where the natural rate of unemployment is a function of nonstationary real long-term interest rates.

Indeterminacies in Wage and Asset Price Expectations

2013 ◽  
Author(s):  
Edmund S. Phelps
Keyword(s):  
Asset Prices ◽  
Asset Price ◽  
Housing Prices ◽  
The United States ◽  
Natural Rate ◽  
John Maynard Keynes ◽  
Price Expectations ◽  
Expectation Formation ◽  
Natural Rate Of Unemployment

This chapter examines indeterminacies in wage and asset price expectations. It first considers what it argues are fatal flaws in Keynesian economics, comparing crude Keynesianism with a crude natural rate of unemployment. It then introduces a structuralist model of employment and economic growth that better illuminates the long slump without inflation in the United States. In a structuralist model, nonmonetary forces operate through structural channels to impact the path of employment and its medium-term level (as well as its long-term level). Asset prices, such as housing prices, are expressed in real terms. The chapter describes how structuralist models approaches issues relating to asset prices and wages and concludes by explaining how to think about expectation formation in modern economies—economies of the sort that became the lifetime subject of Frank H. Knight, John Maynard Keynes, and F. A. Hayek.

The Imperfect Knowledge Imperative in Modern Macroeconomics and Finance Theory

2013 ◽  
Author(s):  
Roman Frydman ◽  
Michael D. Goldberg
Keyword(s):  
Behavioral Finance ◽  
Real World ◽  
Rational Expectations ◽  
Individual Behavior ◽  
Expectations Hypothesis ◽  
Alternative Approach ◽  
World Markets ◽  
Imperfect Knowledge ◽  
Finance Theory ◽  
Imperfect Knowledge Economics

This chapter examines the imperfect knowledge imperative in modern macroeconomics and finance theory. It argues that the Rational Expectations Hypothesis (REH) has nothing to do with how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. It attributes REH's insurmountable epistemological difficulties and widespread empirical problems to a single, overarching premise that underpins contemporary macroeconomics and finance theory: nonroutine change is unimportant for understanding outcomes. It also suggests that contemporary behavioral finance models rest on the same core premise as their REH-based counterparts. Finally, it introduces an alternative approach to modeling individual behavior and aggregate outcomes: Imperfect Knowledge Economics, which opens macroeconomics and finance models to nonroutine change and the imperfect knowledge that it engenders.

Rethinking Expectations

2013 ◽  
Keyword(s):  
Rational Expectations ◽  
Major Theme ◽  
Expectations Hypothesis ◽  
Market Participants ◽  
Macroeconomic Analysis ◽  
Fortieth Anniversary ◽  
Boom And Bust ◽  
To Come ◽  
Microeconomic Foundations

This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark “Phelps microfoundations volume,” Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, this book argues 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 the book 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. The introductory chapter interprets the various efforts to reconstruct the field—some of which promise to chart its direction for decades to come.

The Long Swings of Employment, Investment, and Asset Prices

2013 ◽  
Author(s):  
Gylfi Zoega
Keyword(s):  
Financial Crises ◽  
Asset Prices ◽  
Asset Price ◽  
Rate Model ◽  
Natural Rate ◽  
Share Prices ◽  
Natural Rate Of Unemployment ◽  
The Relationship

This chapter examines the long swings of employment, investment, and asset prices. It highlights one stylized fact that a model of the natural rate of unemployment should be able to take into account: the relationship among unemployment, investment, and share prices that is observed in the data. Although this relationship is often ignored, it provides a justification for some recent models of the natural rate. The chapter first considers a moving natural rate of unemployment before discussing the relationship between the long swings of employment and asset price swings. It then introduces a stripped-down natural rate model that generates a relationship among the natural rate of unemployment, investment, and asset prices. It also describes how financial crises are linked to changes in asset prices, investment, and employment.

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