NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Macroeconomic Analysis without the Rational Expectations Hypothesis

Michael Woodford

NBER Working Paper No. 19368
Issued in August 2013
NBER Program(s):   EFG   ME

This paper reviews a variety of alternative approaches to the specification of the expectations of economic decisionmakers 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 trade-off between inflation stabilization and output-gap stabilization; and the possibility of a "deflation trap."

download in pdf format
   (400 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19368

Published: Michael Woodford, 2013. "Macroeconomic Analysis Without the Rational Expectations Hypothesis," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 303-346, 05. citation courtesy of

Users who downloaded this paper also downloaded these:
Berg, Puri, and Rocholl w19051 Loan officer Incentives and the Limits of Hard Information
Aguiar and Amador w19388 Sovereign Debt: A Review
Farmer, Khramov, and Nicolò w19457 Solving and Estimating Indeterminate DSGE Models
Gordon w19390 The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery
Beaudry and Portier w19411 News Driven Business Cycles: Insights and Challenges
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us