A Technical Definition of Uncertainty and the Long-run Non-neutrality of Money
A technical definition of uncertainty can be developed if economic observations can be generated by stochastic processes. Uncertainty about the future is then defined in terms of the existence of a nonergodic economic environment. In such an environment, statistics based on either cross-sectional data or on past time-series data do not provide good forecasts of future outcomes, i.e., past evidence does not provide reliable estimates of future results. The problem facing every decisionmaker is to determine whether the phenomena is sufficiently time invariant as to be presumed ergodic or whether nonergodic circumstances are involved. Keynes's use of uncertainty in the discussion of liquidity is compatible with a nonergodic environment. Only in a nonergodic environment do the concepts of money, fixed contracts, and liquidity make sense, and then all existence theorems for general equilibrium are jeopardized. Copyright 1988 by Oxford University Press.
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Volume (Year): 12 (1988)
Issue (Month): 3 (September)
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