This book originated from a 2010 conference marking the fortieth
anniversary of the publication of the landmark "Phelps volume,"
"Microeconomic Foundations of Employment and Inflation Theory," a
book that is often credited with pioneering the currently dominant
approach to macroeconomic analysis. However, in their provocative
introductory essay, Roman Frydman and Edmund Phelps argue that the
vast majority of macroeconomic and finance models developed over
the last four decades derailed, rather than built on, the Phelps
volume's "microfoundations" approach. Whereas the contributors to
the 1970 volume recognized the fundamental importance of according
market participants' expectations an autonomous role, contemporary
models rely on the rational expectations hypothesis (REH), which
rules out such a role by design.
The financial crisis that began in 2007, preceded by a
spectacular boom and bust in asset prices that REH models implied
could never happen, has spurred a quest for fresh approaches to
macroeconomic analysis. While the alternatives to REH presented in
"Rethinking Expectations" differ from the approach taken in the
original Phelps volume, they are notable for returning to its major
theme: understanding aggregate outcomes requires according
expectations an autonomous role. In the introductory essay, Frydman
and Phelps interpret the various efforts to reconstruct the
field--some of which promise to chart its direction for decades to
come.
The contributors include Philippe Aghion, Sheila Dow, George W.
Evans, Roger E. A. Farmer, Roman Frydman, Michael D. Goldberg,
Roger Guesnerie, Seppo Honkapohja, Katarina Juselius, Enisse
Kharroubi, Blake LeBaron, Edmund S. Phelps, John B. Taylor, Michael
Woodford, and Gylfi Zoega.
General
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