Book contents
- Frontmatter
- Contents
- List of contributors
- Preface
- 1 Introduction
- 2 The trouble with “rational expectations” and the problem of inflation stabilization
- 3 Expectations of others' expectations and the transitional nonneutrality of fully believed systematic monetary policy
- 4 The stability of rational expectations in macroeconomic models
- 5 Individual rationality, decentralization, and the rational expectations hypothesis
- 6 Convergence to rational expectations equilibrium
- 7 A distinction between the unconditional expectational equilibrium and the rational expectations equilibrium
- 8 On mistaken beliefs and resultant equilibria
- 9 Equilibrium theory with learning and disparate expectations: some issues and methods
- 10 Keynesianism, monetarism, and rational expectations: some reflections and conjectures
- Index
3 - Expectations of others' expectations and the transitional nonneutrality of fully believed systematic monetary policy
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- List of contributors
- Preface
- 1 Introduction
- 2 The trouble with “rational expectations” and the problem of inflation stabilization
- 3 Expectations of others' expectations and the transitional nonneutrality of fully believed systematic monetary policy
- 4 The stability of rational expectations in macroeconomic models
- 5 Individual rationality, decentralization, and the rational expectations hypothesis
- 6 Convergence to rational expectations equilibrium
- 7 A distinction between the unconditional expectational equilibrium and the rational expectations equilibrium
- 8 On mistaken beliefs and resultant equilibria
- 9 Equilibrium theory with learning and disparate expectations: some issues and methods
- 10 Keynesianism, monetarism, and rational expectations: some reflections and conjectures
- Index
Summary
One of the most striking results of the rational expectations literature is the proposition that systematic monetary policy has no effect on the probability distribution of output, unless the monetary authority possesses an informational advantage over the public. In the absence of such superior information, systematic variations in the money supply will be completely anticipated, and the Phillips curve will become vertical, even in the short run, as suggested by Lucas (1972), Sargent and Wallace (1975), and Barro (1976).
Some of the assumptions underlying the rational expectations paradigm have been challenged in recent macroeconomic research. One strand of the literature, represented mainly by Fischer and Phelps and Taylor, has reintroduced stickiness of wages and prices to revitalize the effect of systematic monetary policy on short-run output behavior. The theory is that frequent or rapid transmission of price and wage decisions is too costly to warrant responses by many firms in the time within which the central bank can react to economic disturbances (Fischer, 1977; Phelps and Taylor, 1977).
A different approach has been followed by those emphasizing credibility and uncertainties about temporary versus permanent changes in economic conditions. John Taylor (1975) constructed a model in which the agents already know the “true” model of the economy, with the single exception of the value of one parameter in the equation describing the money supply rule. He showed that the monetary authority will be able to influence output in the transitional period during which the agents are gradually discovering the true value of the aforementioned parameter.
- Type
- Chapter
- Information
- Individual Forecasting and Aggregate Outcomes'Rational Expectations' Examined, pp. 47 - 68Publisher: Cambridge University PressPrint publication year: 1984