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Rethinking ExpectationsThe Way Forward for Macroeconomics$
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Roman Frydman and Edmund S. Phelps

Print publication date: 2013

Print ISBN-13: 9780691155234

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691155234.001.0001

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Expectational Coordination Failures and Market Volatility

Expectational Coordination Failures and Market Volatility

(p.49) Chapter One Expectational Coordination Failures and Market Volatility
Rethinking Expectations

Roger Guesnerie

Princeton University Press

This chapter examines one line of criticism of the Rational Expectations Hypothesis (REH): expectational coordination failures. It begins by addressing the question of what went wrong with standard economic theory in general and with its modeling principles in particular and offers three answers relating to the diversification of modeling, the rationality hypothesis, and expectational coordination. It then considers the rise of REH in modern economic theory before discussing three avenues of criticism against REH: internal challenges, external criticisms, and criticism based on real-time learning. It also explains how a critical assessment of REH in different contexts changes the standard (REH-based) economic intuition, focusing on the question of the value of new financial instruments; the informational efficiency of the market; and the “good” expectational coordination that Real Business Cycles (RBC)-like models.

Keywords:   expectational coordination, Rational Expectations Hypothesis, economic theory, rationality, real-time learning, financial instruments, informational efficiency, Real Business Cycles

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