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Macroeconomic Theory for a World of Imperfect Knowledge

Listed author(s):
  • Frydman Roman

    (New York University)

  • Goldberg Michael D.

    (University of New Hampshire)

Registered author(s):

    We have recently proposed an alternative approach to economic analysis, which we call Imperfect Knowledge Economics (IKE). Although IKE builds on the methodology of contemporary macroeconomics by modeling aggregate outcomes on the basis of mathematical representations of individual decision making, it jettisons models that generate sharp predictions. In this paper, we elaborate on and extend the arguments that led us to propose IKE. We show analytically that in order to avoid the fundamental epistemological flaws inherent in extant models, economists must stop short of fully prespecifying change. We also show how acknowledging the limits of their knowledge may enable economists to shed new light on the basic features of observed time-series of market outcomes, such as fluctuations and risk in asset markets, which have confounded extant approaches for decades.

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    Article provided by De Gruyter in its journal Capitalism and Society.

    Volume (Year): 3 (2008)
    Issue (Month): 3 (December)
    Pages: 1-78

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    Handle: RePEc:bpj:capsoc:v:3:y:2008:i:3:n:1
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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    2. Roman Frydman & Michael D. Goldberg & Søren Johansen & Katarina Juselius, 2008. "A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings," Discussion Papers 08-31, University of Copenhagen. Department of Economics.
    3. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
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    19. Søren Johansen & Katarina Juselius & Roman Frydman & Michael Goldberg, 2007. "Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate," Discussion Papers 07-34, University of Copenhagen. Department of Economics.
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