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2010-04-12

Understand the meaning of adaptive versus rational expectations

Most economics profession over the past three decades know the importance of the rational expectations (RE) revolution in macroeconomics.

While in reality the real challenge of RE to macroeconomic policies is much more limited than the policy ineffectiveness implies, the economics profession has embraced RE with much enthusiasm and the applications of RE in economic thinking, studies or modelling cannot be understated.

However, it appears incredibly strange that many economists still don't apply RE in their work when it is extremely relevant.

The most noticeable issue is that many economists know some economic theories are not working or are severely deficient in the wake of the GFC, but they still rely on them for their work, rather than seeking new and better theories.

That is not rational, rather it is very much adaptive.

It is possibly worse than being adaptive because they have not even adapted after the GFC!

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