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Macroeconomic Theory for a World of Imperfect Knowledge

Author

Listed:
  • Frydman Roman

    (New York University)

  • Goldberg Michael D.

    (University of New Hampshire)

Abstract

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.

Suggested Citation

  • Frydman Roman & Goldberg Michael D., 2008. "Macroeconomic Theory for a World of Imperfect Knowledge," Capitalism and Society, De Gruyter, vol. 3(3), pages 1-78, December.
  • Handle: RePEc:bpj:capsoc:v:3:y:2008:i:3:n:1
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    References listed on IDEAS

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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.
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    Cited by:

    1. D. COLANDER & al., 2010. "The Financial Crisis and the Systemic Failure of Academic Economics," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 6.
    2. Katarina Juselius, 2011. "On the Role of Theory and Evidence in Macroeconomics," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 17 Edward Elgar Publishing.
    3. Katarina Juselius, 2011. "On the Role of Theory and Evidence in Macroeconomics," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 17 Edward Elgar Publishing.
    4. Johansen, Søren & Juselius, Katarina & Frydman, Roman & Goldberg, Michael, 2010. "Testing hypotheses in an I(2) model with piecewise linear trends. An analysis of the persistent long swings in the Dmk/$ rate," Journal of Econometrics, Elsevier, vol. 158(1), pages 117-129, September.
    5. Barker, Richard & Hendry, John & Roberts, John & Sanderson, Paul, 2012. "Can company-fund manager meetings convey informational benefits? Exploring the rationalisation of equity investment decision making by UK fund managers," Accounting, Organizations and Society, Elsevier, vol. 37(4), pages 207-222.
    6. Olesia Kozlova, 2013. "Forward-Rate Bias, Imperfect Knowledge, and Risk: Evidence from Developed and Developing Countries," 2013 Papers pko627, Job Market Papers.
    7. Angel Asensio, 2013. "Teaching Keynes’s theory to neoclassically formed minds," Chapters,in: Teaching Post Keynesian Economics, chapter 10, pages 163-186 Edward Elgar Publishing.
    8. Robert Kelm, 2010. "The Exchange Rate and Two Price Inflations in Poland in the Period 1999-2009. Do Globalization and Balassa-Samuelson Effect Matter?," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 2(4), pages 315-349, September.
    9. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.

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