Search Results

This chapter extends the field of application of the theory of psychological time and memory decay to nominal interest rates by looking at their correlation with the perceived rate of nominal growth in eighteen countries. It begins with an overview of the theory of the psychological rate of interest, paying special attention to the psychological symmetry between memory decay and future discounting. It then considers whether the psychological rate of interest computed from the sequence of quarterly nominal GDP growth rates is compatible with U.S. AAA corporate bond yields since 1951. It also presents empirical observations about nominal interest rates and the perceived rate of nominal growth and proceeds to discuss nominal interest rates at the end of the German hyperinflation as well as the application of the theory of the psychological rate of interest to the yield on British Consols during the nineteenth century. It concludes that Maurice Allais's theory of the psychological rate of interest is not compatible with a broader set of empirical data.

This chapter illustrates the dynamic properties of the HRL formulation by means of a detailed numerical example based on the hyperinflation observed in Zimbabwe between 2000 and 2008. It first presents the results of dynamic equilibrium and dynamic disequilibrium simulations. It shows that the perceived rate of inflation converged asymptotically toward the instantaneous rate of inflation. This asymptotic convergence happens because the rate of memory decay grows exponentially and the elasticity of the perceived rate of inflation with respect to the instantaneous rate of inflation converges toward unity. The duration of the memory of inflation is also computed, along with the distribution of forecasting errors in the HRL formulation. Finally, the chapter examines how the HRL formulation sheds light on what Charles P. Kindleberger calls “some historical puzzles in macroeconomic behavior”.

This book concludes by summarizing the key arguments in the form of a comparison of the HRL formulation with the rational expectations hypothesis (REH). It explains what makes Maurice Allais's contribution original, important, and modern. To start with, many of the rational expectations theorists' criticisms of standard adaptive expectations do not apply to the HRL formulation. The HRL formulation is much more sophisticated and much more rational than the standard adaptive expectations model tolerated by the REH advocates when economic variables are interdependent. Furthermore, the variability of the rate of memory decay is endogenous both to economic agents and to the environment they are responding to. Parsimony, nonlinearity and time variability of the gain, unequal weighting of past observations according to a well-specified and stable law of forgetting, absence of patterns in forecasting errors—these are the features that make Allais's HRL formulation worth the consideration of economists wishing to explore or to revisit the unsettled and important question of “expectations” formation.