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On the limits of rational expectations for policy analysis

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  • Martin Eichenbaum

Abstract

In this lecture, I review work addressing three questions. First, are predictions about macro stabilization policies robust to reasonable departures from rational expectations? Second, do people's expectations converge to a particular set of rational expectations? Third, if they do converge, how quickly? I discuss examples from the literature where the answer to the first question is no. The answer to the second question is that learning equilibria converge to the “standard” rational equilibria analyzed in new Keynesian models. Finally, I discuss circumstances under which the answer to the third question is very slowly. In the examples, learning is slowest and policy analysis based on rational expectations is least robust in the face of shocks that render the stakes of getting policy “right” the highest. Les limites des attentes rationnelles pour l'analyse des politiques. Dans cette conférence, je passe en revue les travaux réalisés concernant trois questions. Premièrement, les prédictions sur les politiques de macrostabilisation sont‐elles robustes pour s'écarter raisonnablement des attentes rationnelles? Deuxièmement, les attentes des gens convergent‐elles vers un ensemble particulier d'attentes rationnelles? Troisièmement, si elles convergent, à quelle vitesse cela se produit‐il? Je discute d'exemples tirés de la littérature où la réponse à la première question est négative. La réponse à la deuxième question est que l'équilibre d'ajustement converge vers l'équilibre rationnel « standard » analysé dans les nouveaux modèles keynésiens. Enfin, je discute des circonstances où la réponse à la troisième question est une vitesse très lente. Dans nos exemples, l'apprentissage est plus lent et l'analyse des politiques fondée sur les attentes rationnelles est moins robuste lorsque des chocs font que les enjeux de choisir la « bonne » politique sont les plus élevés.

Suggested Citation

  • Martin Eichenbaum, 2023. "On the limits of rational expectations for policy analysis," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1221-1237, November.
  • Handle: RePEc:wly:canjec:v:56:y:2023:i:4:p:1221-1237
    DOI: 10.1111/caje.12697
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