Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.003.0002
- Subject:
- Economics and Finance, Behavioural Economics
This chapter examines the main assumptions of the rational expectations hypothesis (REH). REH is a pillar of the neo-Walrasian approach to general equilibrium, a mathematically demanding theory ...
More
This chapter examines the main assumptions of the rational expectations hypothesis (REH). REH is a pillar of the neo-Walrasian approach to general equilibrium, a mathematically demanding theory purporting to show how the interaction between rational agents engaged in constrained maximization of consumption, production, profits, etc., over time, generates a unique and stable intertemporal equilibrium. This chapter first provides a historical overview of REH before discussing John Muth's critique of exponential averages as a forecasting technique and his claim that exponential smoothing is an optimal filtering method, along with his other arguments against adaptive expectations. It then considers the application of REH to macroeconomics and proceeds by analyzing some of the criticisms against REH, including the mathematical or computational difficulties present in RE models and the compatibility of RE models with empirical data. Finally, it highlights REH's limited methodological relevance when it comes to modeling observed economic behavior.Less
This chapter examines the main assumptions of the rational expectations hypothesis (REH). REH is a pillar of the neo-Walrasian approach to general equilibrium, a mathematically demanding theory purporting to show how the interaction between rational agents engaged in constrained maximization of consumption, production, profits, etc., over time, generates a unique and stable intertemporal equilibrium. This chapter first provides a historical overview of REH before discussing John Muth's critique of exponential averages as a forecasting technique and his claim that exponential smoothing is an optimal filtering method, along with his other arguments against adaptive expectations. It then considers the application of REH to macroeconomics and proceeds by analyzing some of the criticisms against REH, including the mathematical or computational difficulties present in RE models and the compatibility of RE models with empirical data. Finally, it highlights REH's limited methodological relevance when it comes to modeling observed economic behavior.
Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.003.0004
- Subject:
- Economics and Finance, Behavioural Economics
This chapter examines the microfoundations of Maurice Allais's theory of monetary dynamics, with particular emphasis on his hereditary, relativist, and logistic (HRL) formulation of the demand for ...
More
This chapter examines the microfoundations of Maurice Allais's theory of monetary dynamics, with particular emphasis on his hereditary, relativist, and logistic (HRL) formulation of the demand for money. According to the HRL formulation, the ratio of desired money-to-aggregate nominal spending is a logistic decreasing function of the present value of past growth rates in nominal spending. Allais assumed that the demand for money was a function of nominal growth “expectations” and that “expectations” were formed adaptively and could be represented by an exponential average of the sequence of historic rates of nominal growth. He observed that exponential averages were good at fitting empirical data on average over whole samples, but were struggling with the different phases of inflationary processes. Allais modeled this observed variability of the elasticity of “expectations” by formulating three psychological assumptions: the hereditary assumption, the relativist assumption, and the logistic assumption. The chapter discusses these three assumptions and the elasticities in the HRL formulation before concluding with an analysis of how the HRL formulation quantifies the perceived flow of calendar time.Less
This chapter examines the microfoundations of Maurice Allais's theory of monetary dynamics, with particular emphasis on his hereditary, relativist, and logistic (HRL) formulation of the demand for money. According to the HRL formulation, the ratio of desired money-to-aggregate nominal spending is a logistic decreasing function of the present value of past growth rates in nominal spending. Allais assumed that the demand for money was a function of nominal growth “expectations” and that “expectations” were formed adaptively and could be represented by an exponential average of the sequence of historic rates of nominal growth. He observed that exponential averages were good at fitting empirical data on average over whole samples, but were struggling with the different phases of inflationary processes. Allais modeled this observed variability of the elasticity of “expectations” by formulating three psychological assumptions: the hereditary assumption, the relativist assumption, and the logistic assumption. The chapter discusses these three assumptions and the elasticities in the HRL formulation before concluding with an analysis of how the HRL formulation quantifies the perceived flow of calendar time.
