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!
Showing posts with label rational expectations. Show all posts
Showing posts with label rational expectations. Show all posts
2009-06-05
Economists debate - interesting but not necessarily always productive
Comments on Richard Pomfret “Too soon for obituaries: economics is alive and (reasonably) well”, 4/06/2009, http://www.eastasiaforum.org/2009/06/04/too-soon-for-obituaries-economics-is-alive-and-reasonably-well/
Although I studied some economics, my economics is really rusty. So to engage in a debate among professional economists, especially academics, is a little over reach for me. It seems that all the people on both sides can be supervisors for me to do another PhD in economics (and one was actually my supervisor when I did one in the early 1990s, although I won’t say who). But I am encouraged by the ongoing economic crisis and may act like a venture economist (capitalist) in the debate. Forgive me if I am too naïve or wrong.
It is probably a fact and normal to have economists who may often disagree among themselves. In fact, some jokes on economists include one like that if you have N economists in a room you may have N or more different opinions.
Some economists tend to develop their own new theories (and some may withstand tests) by killing or wounding existing theories. Yes, it is perfectly normal to find the shortcomings of existing theories to progress and advance. But history of economics appears to suggest that the birth of new theories do not necessarily mean the death of existing ones. They may all live and thrive well under particular conditions, that is they may have their usefulness and suitable for some cases.
There have been debates between monetarists and Keynesians. The rational expectations revolution in the 1970s produced the famous result of policy ineffectiveness. But when times of crises, policy makers have no other tools but the two main ones: fiscal and monetary policies, though expectations have become an important part in modelling.
From these limited (but fairly famous ones) episodes of economics, it is not too difficulty to see that both monetary and fiscal policies as well as expectations, both rational and adaptive are useful. It is seldom the case in economics that one theory will always replace another, irrespective whether the proponents of new theories may tend to say otherwise.
So let’s move beyond formalities, though useful they may be, and focus on advancing economics. If the debate can provide some new useful insights into the current economic crisis, it will be good. It will be even better if some policy solutions can be found in the process.
Although I studied some economics, my economics is really rusty. So to engage in a debate among professional economists, especially academics, is a little over reach for me. It seems that all the people on both sides can be supervisors for me to do another PhD in economics (and one was actually my supervisor when I did one in the early 1990s, although I won’t say who). But I am encouraged by the ongoing economic crisis and may act like a venture economist (capitalist) in the debate. Forgive me if I am too naïve or wrong.
It is probably a fact and normal to have economists who may often disagree among themselves. In fact, some jokes on economists include one like that if you have N economists in a room you may have N or more different opinions.
Some economists tend to develop their own new theories (and some may withstand tests) by killing or wounding existing theories. Yes, it is perfectly normal to find the shortcomings of existing theories to progress and advance. But history of economics appears to suggest that the birth of new theories do not necessarily mean the death of existing ones. They may all live and thrive well under particular conditions, that is they may have their usefulness and suitable for some cases.
There have been debates between monetarists and Keynesians. The rational expectations revolution in the 1970s produced the famous result of policy ineffectiveness. But when times of crises, policy makers have no other tools but the two main ones: fiscal and monetary policies, though expectations have become an important part in modelling.
From these limited (but fairly famous ones) episodes of economics, it is not too difficulty to see that both monetary and fiscal policies as well as expectations, both rational and adaptive are useful. It is seldom the case in economics that one theory will always replace another, irrespective whether the proponents of new theories may tend to say otherwise.
So let’s move beyond formalities, though useful they may be, and focus on advancing economics. If the debate can provide some new useful insights into the current economic crisis, it will be good. It will be even better if some policy solutions can be found in the process.
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