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Macroeconomic Analysis Without the Rational Expectations Hypothesis

  • Michael Woodford

    ()

    (Department of Economics, Columbia University, New York, NY 10027)

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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File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080511-110857
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Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 5 (2013)
Issue (Month): 1 (05)
Pages: 303-346

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Handle: RePEc:anr:reveco:v:5:y:2013:p:303-346
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  1. Adam, Klaus & Woodford, Michael, 2012. "Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model," Working Papers 12-01, University of Mannheim, Department of Economics.
  2. Jess Benhabib & George W. Evans & Seppo Honkapohja, 2014. "Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?," CDMA Working Paper Series 201407, Centre for Dynamic Macroeconomic Analysis.
  3. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  4. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
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  19. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2010. "Does Ricardian Equivalence Hold When Expectations are not Rational?," SIRE Discussion Papers 2010-73, Scottish Institute for Research in Economics (SIRE).
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  25. Stefano Eusepi & Bruce Preston, 2013. "Fiscal foundations of inflation: imperfect knowledge," Staff Reports 649, Federal Reserve Bank of New York.
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