Rational Expectations As Well As Phillips Curves

              Two pocket-size points next upwards on my previous post on microfoundations.

1) Adopting rational expectations equally the default expectations model has never meant (for me at least) ignoring the possibility of non-random expectations errors. As Lars Syll for example Ellison, Martin & Pearlman, Joseph, 2011. "Saddlepath learning," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1500-1519), I couldn’t maybe disagree. However I hollo back it is highly unlikely that learning volition negate the advances inwards agreement monetary policy that I referenced inwards my previous post.

For about variables inwards about situations, a baseline where expectations were formed inwards a naive agency mightiness hold out to a greater extent than appropriate. Some aspects of conduct chances maybe? However inflation inwards a describe of piece of occupation concern wheel amongst an independent key banking corporation is non ane of these. David Glasner talks here almost the “the tyrannical methodology of rational expectations”. I but create non run across it that way. Rational expectations create non foreclose us agreement sustained periods of deficient demand when an inflation targeting key banking corporation hits a lower bound. Indeed they help, because amongst rational expectations inflation targeting prevents inflation expectations delivering the existent involvement charge per unit of measurement nosotros need, equally I bring argued here.  

2) I talked almost both rational expectations too the New Keynesian Phillips crease (NKPC) inwards providing the theoretical impetus to inflation targeting yesteryear independent key banks. H5N1 comment asked why I position the 2 together. The latter goes amongst the former, because rational expectations amongst the to a greater extent than traditional Phillips crease imply deviations from the natural charge per unit of measurement are random, which is totally destructive of Keynesian theory. (If inflation at fourth dimension t depends on the output gap too expected inflation at fourth dimension t - rather than t+1 equally inwards the NKPC - too the difference betwixt actual too expected inflation is a random fault because expectations are rational, too then the output gap is besides a random error.)

The traditional Phillips crease has ever seemed to me to hold out an promotion for the dangers of non doing microfoundations. It seems plausible enough, which is why it was used routinely before the rational expectations revolution. But it contains the serious flaw noted above, which almost destroyed Keynesian economics. I know this is non realistic, but imagine that Calvo (1983) ‘Staggered prices inwards a utility maximising framework’ Journal of Monetary Economics Vol 12 pp 383-398 had been published a decade or to a greater extent than earlier, equally a straight reply to Friedman’s 1968 presidential address. Who knows what would bring happened next, but it is hard to imagine the history of macroeconomic persuasion beingness worse equally a result.