Rethinking Expectations

Roman Frydman is professor of economics at New York University and the coauthor (with Michael D. Goldberg) of Beyond Mechanical Markets and Imperfect Knowledge Economics. Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, is director of Columbia University's Center on Capitalism and Society. His many books include Structural Slumps and Seven Schools of Macroeconomic Thought.

• Which Way Forward for Macroeconomics and Policy Analysis? 1 Roman Frydman and Edmund S. Phelps PART ONE Back to the Foundations 1Expectational Coordination Failures and Market Volatility 49 Roger Guesnerie 2Learning as a Rational Foundation for Macroeconomics and Finance 68 George W. Evans and Seppo Honkapohja 3Keynes on Knowledge, Expectations, and Rationality 112 Sheila Dow 4The Imperfect Knowledge Imperative in Modern Macroeconomics and Finance Theory 130 Roman Frydman and Michael D. Goldberg PART TWO Autonomous Expectations in Long Swings in Asset Prices 5Heterogeneous Gain Learning and Long Swings in Asset Prices 169 Blake LeBaron 6Opening Models of Asset Prices and Risk to Nonroutine Change 207 Roman Frydman and Michael D. Goldberg PART THREE Rethinking Unemployment-Inflation Trade-offs and the Natural Rate Theory 7Animal Spirits, Persistent Unemployment, and the Belief Function 251 Roger E. A. Farmer 8Indeterminacies in Wage and Asset Price Expectations 277 Edmund S. Phelps 9The Long Swings of Employment, Investment, and Asset Prices 301 Gylfi Zoega 10Imperfect Knowledge, Asset Price Swings, and Structural Slumps 328 Katarina Juselius 11Stabilization Policies and Economic Growth 351 Philippe Aghion and Enisse Kharroubi PART FOURPolicymaking after "Rational Expectations" 12Swings and the Rules-Discretion Balance 373 John B. Taylor 13Principled Policymaking in an Uncertain World 389 Michael Woodford Contributors 415 Index 421

"The 1970 Phelps volume has been extremely influential in macroeconomics. Three of its contributors went on to win Nobel prizes for work detailed in the book, and it inspired many others who contributed to the small equilibrium models that became the workhorses of macroeconomics. Yet virtually all of these models use the assumption of rational expectations. In this new volume, Phelps and Roman Frydman assemble a new group of scholars to critique the work based on rational expectations. Phelps and Frydman argue that rational expectations destroyed one of the key premises of the original book—that independent expectations are critical for understanding macroeconomic phenomena. The contributors to this follow-up volume make a convincing case for the failure of several models with rational expectations, and present thought-provoking alternatives. Their efforts to build macroeconomic models without the rational expectations hypothesis might have the impact in their areas of research that the original volume had."—Christopher Pissarides, Nobel Laureate in Economics