American Economic Review Vol. 97 No. 2 2007
Beliefs, Doubts and Learning: Valuing Macroeconomic Risk
Abstract
This essay examines the problem of inference within a rational expectations model from two perspectives: that of an econometrician and that of the economic agents within the model. The assumption of rational expectations has been and remains an important component to quantitative research. It endows economic decision makers with knowledge of the probability law implied by the economic model. As such, it is an equilibrium concept. Imposing rational expectations removed from consideration the need for separately specifying beliefs or subjective components of uncertainty. Thus, it simplified model specification and implied an array of testable implications that are different from those considered previously. It reframed policy analysis by questioning the effectiveness of policy levers that induce outcomes that differ systematically from individual beliefs.
- DOI
- 10.1257/aer.97.2.1
- Volume
- 97
- Issue
- 2
- Pages
- 1-30
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex