neutrality of money

[econphilomath]

oh and the book by walsh is graduate base textbook for monetary theory. Standard at lots of graduate programs or advanced undergrad...at least thats what they told me when I got it rammed down my throat. The last edition has a good summary of the modern macro model.

[bscout]

We use Walsh's book (and Romer's one) in my undergraduate in Monetary Economics.

[xxandyxx07]

I personally think that Rational Expectations Hypothesis is epistomedilogically flawed and it should be scrapped because it is not an accurate portrayal of how people and firms model expectations. If we can find a more realistic framework, then a more realistic macroeconomic paradigm can be formed. Keep an eye out for current research being undertaken by Edmund Phelps and Roman Frydman (the book is due out in Fall 2007). They propose a new framework which they dub "Imperfect Knowledge Framework," building upon Kahneman/Tversky's prospect theory.

[Cassin]

I personally think that Rational Expectations Hypothesis is epistomedilogically flawed and it should be scrapped because it is not an accurate portrayal of how people and firms model expectations.

That's not enough. Models' assumptions don't need to be, rather they are supposed to make realistic predictions. E.g. when building bridges, engineers use Newtons' laws, assume fricitonless pulleys, weight-less strings NOT Einstein's General Relativity because ideal mechanics and kinematics give pretty good predictions.

If you are not aware, "adaptive expectations"/conjectured variations were used before rational expectations but these tend to be out-of-equilibrium concepts. Rational expectations took some work to develop.

No one is a an ideal utility maximizer but long-term decisions (esp. financial ones) can be explained pretty well using Bernoulli/von Neuman-Morgenstern framework. In the short-run, some progress can be made adding information, knowledge or rationality frictions.

[xxandyxx07]

Regarding rational expectations, i believe there should be a new framework. during the 1960s, the great idea was to work on plausible microfoundations for macroeconomic nmodeling taking into account the knowledge and the information that the micro actors could reasonable be supposed to have. it seems that rational expectations sidesteps the problems of expectations formulation under uncertainty by blindly assuming that the "agents" know the "correct" model and the correct model is whatever model is fashionable for that day. in that end, it is only a generalizion of the neoclassical idea of equilibrium. wouldn't it be better to improve macro models built up from micro-foundations yet allow for the non-routine ways in which market participants might alter the way they deploy resources. rational expectations assumes that the actors know the probability distribution of outcomes, a clearly strong and incorrect assumption. why not model the change across time in these distributions rather than to model the probability distribution at each point in time? any ideas on whether studying the impacts of imperfect knowledge would be useful in macro?

[econphilomath]

wouldn't it be better to improve macro models built up from micro-foundations yet allow for the non-routine ways in which market participants might alter the way they deploy resources.

Sure, but RE is the baseline you have to compare to. You can always explain something by saying people are not rational....modeling would be point less. RE makes for a good benchmark from which to build upon. So we start by saying what happens if everyone knows everything...then what would happen if something went wrong. If the new idea holds up to intelectual scrutiny we advance as a science. If not its back to the drawing broad. So far its been a lot of the latter.