2013 Reports

# Macroeconomic Analysis Without the Rational Expectations Hypothesis

This paper reviews a variety of alternative approaches to the specification of the expectations of economic decision makers in dynamic models, and reconsiders familiar results in the theory of monetary and fiscal policy when one allows for departures from the hypothesis of rational expectations. The various approaches are all illustrated in the context of a common model, a log-linearized New Keynesian model in which both households and firms solve infinite-horizon decision problems; under the hypothesis of rational expectations, the model reduces to the standard “3-equation model” used in studies such as Clarida et al. (1999). The alternative approaches considered include rationalizable equilibrium dynamics (Guesnerie, 2008); restricted perceptions equilibria (Branch, 2004); decreasing-gain and constant-gain variants of least-squares learning dynamics (Evans and Honkapohja, 2001); rational belief equilibria (Kurz, 2012); and near-rational expectations equilibria (Woodford, 2010). Issues treated include Ricardian equivalence; the determinacy of equilibrium under alternative interest-rate rules; non-fundamental sources of aggregate instability; the tradeoff between inflation stabilization and output-gap stabilization; and the possibility of a “deflation trap.”

## Subjects

## Files

- Woodford_131410.pdf application/pdf 365 KB Download File

## More About This Work

- Academic Units
- Economics
- Publisher
- Department of Economics, Columbia University
- Series
- Department of Economics Discussion Papers, 1314-10
- Published Here
- November 21, 2013