The role of expectations in the choice of monetary policy stanford. In economics expectations are defined as forecasts of future events, which influence decisionmaking. Expectations, learning and macroeconomic persistence. Not many studies have analyzed 3 the empirical implications of adaptive learning. Project muse learning and expectations in macroeconomics. Behavioral uncertainty, learning and expectations in. I expectations of agents will change if policy changes we cannot extrapolate from historic reduced form relationships to gauge the impact of a policy change. The world economic forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas.
The role of expectations in the choice of monetary policy john b. In its stronger forms, re operates as a coordination device that permits the construction of a \representative agent having \representative expectations. This course covers various topics in macroeconomics and is designed to expose students to macroeconomic methods, classic papers in the field, and the latest research at the frontier. This book is the outgrowth of over fifteen years of collaboration between them. Expectations play a central role in modern macroeconomic theories. Experiments on expectations in macroeconomics and finance. A crucial challenge for economists is figuring out how people interpret the world and form expectations that will likely influence their economic activity. The scope is to test whether those mechanical sources of persistence are still necessary to match the data when the assumption of rational expectations is relaxed in favor of learning. Expectations, learning and macroeconomic persistence 4 1 in providing an empirical analysis of the importance of learning, the paper builds on 2 previous literature on adaptive learning in macroeconomics. A central aspect is that expectations influence the time path of the econ omy, and.
Contemporary macroeconomics gives due weight to the role of expecta tions. Monetary dgse models under rational expectations typically require large degrees of features as habit formation in consumption and inflation indexation to match the inertia of macroeconomic variables. Incorporated as a notforprofit foundation in 1971, and headquartered in geneva, switzerland, the forum is tied to no political, partisan or national interests. Modern economic theory recognizes that the central difference between economics and natural sciences lies in the forwardlooking decisions made by economic agents. The role of expectations in the frbus macroeconomic model flint brayton, eileen mauskopf, david reifschneider, peter tinsley, and john williams, of the boards division of research and statistics, prepared this article. In line with this principle, the use of surveybased expectations data has been the mainstay of macroeconomic analysis since the 1940s, analyzing variables such as railroad shippers forecasts. In addition, learning provides new dynamics if older. Learning in macroeconomics refers to models of expectation formation in which. The role of expectations in the choice of monetary policy. Three of its contributors went on to win nobel prizes for work detailed in the book, and it inspired many others who contributed to the small equilibrium models that became the workhorses of macroeconomics. The contextual presence of rational costminimizing and suboptimal behavior in the efm is a common trait in the existing literature.
Learning and expectations in macroeconomics princeton. The role of expectations in economic fluctuations and the efficacy of monetary policy by mordecai kurza, hehui jina and maurizio motoleseb a department of economics, stanford university, stanford, ca. Rational expectations theory definition investopedia. Nimark lucas island model the lucas island model appeared in a series of papers in the early 1970s see lucas 1972. Macroeconomics is basically known as theory of income. More plausible to assume agents have less information. This section compares the marginal likelihoods and posterior model probabilities of the specifications with learning and rational expectations. Economists define expectations as the set of assumptions people make about what will occur in the future. The learning approach provides a stability test for rational expectations and a selection criterion in models with multiple equilibria. The theory of rational expectations re is a collection of assumptions regarding the manner in which economic agents exploit available information to form their expectations. Learning and expectations in macroeconomics george w. The techniques are similar to those used by schorfheide 2000, 2005 and lubik 3 and schorfheide 2004, 2005, among others. In every segment of macroeconomics expectations play a key role. Behavioral uncertainty, learning and expectations in macroeconomics gaetano gaballo ph.
The credibility effect and rational expectations brookings institution. Expectationsofthefuturelevelandrateofgrowthofdemand attitudestoriski. Experiments on expectations in macroeconomics and finance tiziana assenzaa,b, te baoc, cars hommesa, and domenico massaroa acendef, university of amsterdam and tinbergen institute bdepartment of. Learning and expectations in macroeconomics frontiers of. In consumption theory the paradigm lifecycle and permanent income approaches stress the role of expected future incomes.
The impact of expectations on economics world economic forum. We also show that errors in cfo expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational. Expectations and the learning approach princeton university. An attempt is made to outline the general implications of the empirical work which has aimed to. Expectations and investment nber macroeconomics annual. Learning and expectations in macroeconomics book description. Our paper is also related to research on expectations in macroeconomics. The information in expectations data is not subsumed by traditional variables, such as tobins q or discount rates. In the past year, the staff of the board of governors. The rational expectations theory is an economic idea that the people make choices based on their rational outlook, available information and past experiences. Introductory notes on rational expectations 1 overview. It studies the national income, total employment, aggregate demand and supply etc. Firstly, it relates to the literature on behavioral macroeconomics and learning in macroeconomics, for example marcet and nicolini 2003, orphanides and williams 2006, mcgough 2009, 2010.
One of the basic principles of economics in general, and macroeconomics in particular, is that expectations influence decisions. We will explore the effects of news and imperfect information on business cycles, their connection with monetary policy and money nonneutrality. Evans, seppo honkapohja published by princeton university press evans, george w. This series of lectures focuses on the role of informational frictions and expectations in macroeconomics, a topic which has attracted a substantial body of research over the last years.
Expectations in the theory of economics springerlink. This result highlights the potential role of expectations and learning dynamics as sufficient sources of persistence in the economy. This brief revision note looks at the role of expectations. Inflation, asset prices, exchange rates, investment, and consumption are just some of the economic variables that are largely explained by expectations. Brian doyle and steven sumner provided research assistance. Seppo honkapohja is professor of economics at the university of helsinki, where he has currently been appointed academy professor. Expectations matter hugely for businesses and changes in business sentiment have important macroeconomic effects at different stages of the economic cycle.
Macroeconomics is a part of economic study which analyzes the economy as a whole. The rational expectations theory is a concept and modeling technique that is used widely in macroeconomics. The econometric learning approach models economic agents as forming expectations by estimating and updating forecasting models in real time. Intermediate macroeconomics lecture 5 endogenous growth models zs o a l. I policy ine ectiveness proposition i you cannot make people hold systematically false expectations the lucas critique. Learning and expectations in macroeconomics request pdf. For instance, in fellner, towards a reconstruction of macroeconomics. Learning, rational expectations and policy federal reserve bank. The role of expectations in the frbus macroeconomic model pdf. It is left to the data to disentangle the role of the various sources. The first known mention of economic expectations was recorded in ancient greece. Nimark bounded rationality and adaptive learning in these notes we will discuss an approach to bounded rationality known as recursive least squares rls learning where we relax the assumption that agents know the structure. If muthrationality is still the workhorse of macroeconomic.
Pdf learning and expectations in macroeconomics download. The role of expectations in the frbus macroeconomic model. Greenwood and hanson specifically study the shipping industry, and find evidence of boombust cycles driven by volatile and incorrect expectations and investment that follows them. Expectations, learning and macroeconomic persistence 5 1 similarly to recent empirical papers in macroeconomics,7 this paper adopts bayesian methods in 2 the estimation. Professors evans and honkapohja have published extensively in economic journals, and each is best known for his respective research on expectations and learning in dynamic models. In the context of the cobweb model they take the form pe t.
Intermediate macroeconomics lecture 5 endogenous growth. Evans 2 rational expectations solutions to macroeconomic models are equilibria requiring the coordination of expectations, and one can investigate the local stability of these solutions under alternative learning rules. Prob lems of theory and policy american enterprise institute, 1976. It is the average of the entire economy and does not study any individual unit or a firm. Learning and expectations in macroeconomics, evans, george w. Expectedreturnsfromforeigndirectinvestmentprojects expectationsofchangesincorporatetaxation expectationsoffutureprices exchangerates. Best price learning and expectations in macroeconomics frontiers of economic research george w. Rational expectations models in macroeconomics john b. The 1970 phelps volume has been extremely influential in macroeconomics. The role of expectations in economic fluctuations and the. Learning and expectations in macroeconomics on jstor. Expectations and learning in macroeconomics and finance1 ramon marimon this is a course designed for second year and more advanced researchers or postdocs in economics, but it is also open to other researchers, fellows or faculty of the eui.
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