"At this point, readers may want to take a deep breath. Lucas's conclusions are far more sweeping than anything Friedman proposed, and his chain of logic seems much longer. Is it necessarily right? The short answer is, of course, no. There are at least two weak links in the chain. The first is the proposition that a recession lasts only as long as firms are confused about the actual economic situation—in effect, that you can have a recession only as long as most people don't notice. This idea was implicit in the way that Friedman presented his natural rate argument, but it is something that few people other than economists find plausible (and it is possible to accept Friedman's views about stagflation without fully buying his notion that monetary policy works only by fooling people). The second weak link is the whole idea that firms set their prices by closely watching monetary policy or, worse yet, macroeconomic indicators that might help predict monetary policy."
Quote Details
Added by wikiquote-import-bot
Unverified quote
0 likes
Original Language: English
Available Languages (1)
Sources
Paul Krugman, Peddling Prosperity (1994), Ch. 1 : The Attack on Keynes
https://en.wikiquote.org/wiki/Rational_expectations
Revision History
No revisions have been submitted for this quote.
Categories
Rational expectations
37 quotes on TrueQuotesView all quotes by Rational expectations →
Related Quotes
"Using the popular macroeconomic models of the time, Lucas and Sargent showed how replacing traditional assumptions ab…"
"So monetary policy decisions tend to regress toward the mean and to be inertial—and hence biased in just the same way…"
"Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolu…"
"Its development of Mises’s theory of action anticipated much of the rational expectations idea that would later win R…"
"The current macroeconometrics literature has proposed two ways to confront general equilibrium rational expectations …"
"The reason is that the second order properties induced by similar general equilibrium models are, in general, so diff…"
"The Keynesian econometric methodology developed by Klein and associates was criticized by Lucas in his 1976 “Critique…"
"The rational expectations revolution of the 1970s threw out the textbook Keynesian apparatus because it did not cope …"
"In the early 1970s,... economists began to embrace the Rational Expectations Hypothesis (REH), according to which mar…"
"One troublesome aspect is the place of rational expectations macroeconomics in the often political debate over Keynes…"