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Rational Expectations and Inflation$
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Thomas J. Sargent

Print publication date: 2013

Print ISBN-13: 9780691158709

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691158709.001.0001

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Rational Expectations and the Reconstruction of Macroeconomics

Rational Expectations and the Reconstruction of Macroeconomics

(p.1) 1 Rational Expectations and the Reconstruction of Macroeconomics
Rational Expectations and Inflation

Thomas J. Sargent

Princeton University Press

This chapter discusses the rational expectations reconstruction of macroeconomics. In particular, it examines how the hypothesis of rational expectations has been used to develop econometric models that take into account that people's behavior patterns will vary systematically with changes in government policies—the rules of the game. The chapter looks at two examples that illustrate the general presumption that the systematic behavior of private agents and the random behavior of market outcomes both will change whenever agents' constraints change, as when government policy or other parts of the environment change. The first example deals with investment decision, and the second concerns the inflationary effects of government deficits. The chapter also considers the implications of the rational expectations approach for the ways in which policymakers and their advisers think about the choices confronting them.

Keywords:   rational expectations, macroeconomics, econometric model, behavior, government policy, agent, investment decision, inflation, government deficit

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