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Rational Expectations Dynamics: A Methodological Critique

This paper analyses RE macromodels from the methodological perspective. It proposes a particular property, robustness, which should be considered a necessary feature of scientifically valid models in economics, but which is absent from many RE macromodels. To restore this property many macroeconomists resort to detailed and implausible assumptions, which take their models a long way from simple Rational Expectations. The paper draws attention to the problems inherent in the technique of local linearisation and concludes by proposing the use of nonlinear models, analysed globally.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 217.

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Length: 19
Date of creation: 11 Feb 2013
Date of revision:
Handle: RePEc:edn:esedps:217
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  3. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
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  6. Buiter, W, 1982. "Saddlepoint Problems in Continuous Time Rational Expectations Models : A General Method and Some Macroeconomic Examples," The Warwick Economics Research Paper Series (TWERPS) 200, University of Warwick, Department of Economics.
  7. Montiel, Peter & Ul Haque, Nadeem, 1991. "Dynamic responses to policy and exogenous shocks in an empirical developing country model with rational expectations," Economic Modelling, Elsevier, vol. 8(2), pages 201-218, April.
  8. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
  9. Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
  10. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  11. Turnovsky, Stephen J & Sen, Partha, 1991. "Fiscal Policy, Capital Accumulation, and Debt in an Open Economy," Oxford Economic Papers, Oxford University Press, vol. 43(1), pages 1-24, January.
  12. Van De Klundert, T., 1989. "Reducing External Debt In A World With Imperfect Assets And Imperfect Commodity Substitution," Papers 8929a, Tilburg - Center for Economic Research.
  13. Obstfeld, Maurice & Rogoff, Kenneth S., 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Scholarly Articles 12491027, Harvard University Department of Economics.
  14. Chiarella, Carl, 1990. "Excessive exchange rate variability : A possible explanation using nonlinear economic dynamics," European Journal of Political Economy, Elsevier, vol. 6(3), pages 315-352, December.
  15. Søren Bo Nielsen & Peter Birch Sørensen, 1989. "Capital Income Taxation in a Growing Open Economy," Discussion Papers 89-14, University of Copenhagen. Department of Economics.
  16. Benhabib, Jess & Nishimura, Kazuo, 1983. "Competitive Equilibrium Cycles," Working Papers 83-30, C.V. Starr Center for Applied Economics, New York University.
  17. Baumol, William J. & Benhabib, Jess, 1987. "Chaos: Significance, Mechanism, and Economic Applications," Working Papers 87-16, C.V. Starr Center for Applied Economics, New York University.
  18. Frank, Murray Z & Stengos, Thanasis, 1988. " Chaotic Dynamics in Economic Time-Series," Journal of Economic Surveys, Wiley Blackwell, vol. 2(2), pages 103-33.
  19. Buiter, Willem H & Miller, Marcus, 1981. "Monetary Policy and International Competitiveness: The Problems of Adjustment," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 143-75, Supplemen.
  20. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  21. Bankim Chadha, 1991. "Wages, Profitability, and Growth in a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 59-82, March.
  22. Desai, Meghnad, 1973. "Growth cycles and inflation in a model of the class struggle," Journal of Economic Theory, Elsevier, vol. 6(6), pages 527-545, December.
  23. Sussman, Oren, 1991. "Macroeconomic Effects of a Tax on Bond Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 352-66, August.
  24. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  25. Weder, Mark, 2006. "Taylor Rules and Macroeconomic Instability or How the Central Bank Can Preempt Sunspot Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 655-677, April.
  26. Neary, J Peter & Purvis, Douglas D, 1982. " Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 229-53.
  27. Eastwood, R K & Venables, A J, 1982. "The Macroeconomic Implications of a Resource Discovery in an Open Economy," Economic Journal, Royal Economic Society, vol. 92(366), pages 285-99, June.
  28. van der Ploeg, Frederick, 1991. "Money and Capital in Interdependent Economies with Overlapping Generations," Economica, London School of Economics and Political Science, vol. 58(230), pages 233-56, May.
  29. Turnovsky, Stephen J. & Nguyen, Duc-Tho, 1980. "Perfect myopic foresight and the effects of monetary and fiscal policy in a simple inflationary model : Some analytical and numerical results," European Economic Review, Elsevier, vol. 14(2), pages 237-269.
  30. Chiarella, Carl, 1991. "The bifurcation of probability distributions in a non-linear rational expectations model of monetary economy," European Journal of Political Economy, Elsevier, vol. 7(1), pages 65-78, April.
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