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Optimally Rational Expectations and Macroeconomics

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  • David Demery
  • Nigel Duck
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    Abstract

    This paper provides an alternative to the theory of rational expectations (RE). Its central idea is that the information set on which agents will choose to condition their expectations will not, in general, include all the available information. Our alternative has many of the attractive features of RE; it emerges from an explicit choice-theoretic framework; it has wide applicability; and it can in principle explain the failure of models incorporating RE to account for the dynamics of many macroeconomic relationships.

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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp02533.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 02/533.

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    Length: 26 pages
    Date of creation: May 2002
    Date of revision:
    Handle: RePEc:bri:uobdis:02/533

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    Keywords: Rational expectations; incomplete information; macroeconomic dynamics;

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    References

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    1. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
    2. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
    3. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(471), pages C45-61, May.
    4. Pischke, Jörn-Steffen, 1991. "Individual income, incomplete information, and aggregate consumption," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 91-07, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Galbraith, John W, 1988. "Modelling Expectations Formation with Measurement Errors," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 98(391), pages 412-28, June.
    6. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 708-20, September.
    7. Demery, David & Duck, Nigel W, 1999. "Imperfect Information and Consumption in the United States and the United Kingdom," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 66(263), pages 375-87, August.
    8. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 544, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. David Demery & Nigel W. Duck, 2000. "Incomplete information and the time series behaviour of consumption," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(4), pages 355-366.
    10. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(2), pages 669-700, June.
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    Cited by:
    1. David Demery & Nigel Duck, 2003. "Inflation Dynamics and Inflation Regimes," Bristol Economics Discussion Papers, Department of Economics, University of Bristol, UK 03/549, Department of Economics, University of Bristol, UK.

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