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Optimally Rational Expectations and Macroeconomics

Author

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  • David Demery
  • Nigel Duck

Abstract

This paper provides an alternative to the theory of rational expectations (RE). Its central idea is that the information set on which agents will choose to condition their expectations will not, in general, include all the available information. Our alternative has many of the attractive features of RE; it emerges from an explicit choice-theoretic framework; it has wide applicability; and it can in principle explain the failure of models incorporating RE to account for the dynamics of many macroeconomic relationships.

Suggested Citation

  • David Demery & Nigel Duck, 2002. "Optimally Rational Expectations and Macroeconomics," Bristol Economics Discussion Papers 02/533, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:02/533
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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp02533.pdf
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    References listed on IDEAS

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    1. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-840, July.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    3. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    4. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
    5. David Demery & Nigel W. Duck, 2000. "Incomplete information and the time series behaviour of consumption," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(4), pages 355-366.
    6. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    7. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    8. Demery, David & Duck, Nigel W, 1999. "Imperfect Information and Consumption in the United States and the United Kingdom," Economica, London School of Economics and Political Science, vol. 66(263), pages 375-387, August.
    9. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 529-546.
    10. Galbraith, John W, 1988. "Modelling Expectations Formation with Measurement Errors," Economic Journal, Royal Economic Society, vol. 98(391), pages 412-428, June.
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    Cited by:

    1. David Demery & Nigel Duck, 2003. "Inflation Dynamics and Inflation Regimes," Bristol Economics Discussion Papers 03/549, Department of Economics, University of Bristol, UK.

    More about this item

    Keywords

    Rational expectations; incomplete information; macroeconomic dynamics;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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