Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State

Harashima, Taiji (2018): Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State.

Abstract

The rational expectations hypothesis has been criticized for imposing substantial demands on economic agents, and this problem has not been sufficiently solved by introducing a learning mechanism. I present a new approach to this problem by assuming that households behave on the basis of not the rate of time preference but the capital-output (income) ratio. I show that households can equivalently reach and stay at a steady state without doing anything equivalent to computing a complex macro-econometric model. Although households are not required to implement anything difficult, they look to be behaving fully rationally, led by an “invisible hand.”

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital-output ratio; Rational expectation; Steady state; Sustainable heterogeneity; Time preference
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

References

Barro, Robert J. (1999) “Ramsey Meets Laibson in the Neoclassical Growth Model,” The Quarterly Journal of Economics, Vol. 114, No. 4, pp. 1125–1152.

Becker, Gary S. and Casey Mulligan (1997) “The Endogenous Determination of Time Preference,” Quarterly Journal of Economics, Vol. 112, No. 3, pp. 729–758.

Downs, Anthony (1957) An Economic Theory of Democracy, Harper, New York.

Ellison, Martin and Joseph Pearlman (2011) “Saddlepath Learning,” Journal of Economic Theory, Vol. 146, No. 4, pp. 1500-1519.Evans, George W. and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics, Princeton and Oxford, Princeton University Press.

Harashima, Taiji (2004) “A More Realistic Endogenous Time Preference Model and the Slump in Japan,” EconWPA Working Papers, ewp-mac0402015.

Harashima, Taiji (2009) “Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path,” MPRA (The Munich Personal RePEc Archive) Paper No. 18987.

Harashima, Taiji (2010) “Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population,” MPRA (The Munich Personal RePEc Archive) Paper No. 24233.

Harashima, Taiji (2012) “Sustainable Heterogeneity as the Unique Socially Optimal Allocation for Almost All Social Welfare Functions,” MPRA (The Munich Personal RePEc Archive) Paper No. 40938.

Harashima, Taiji (2014) “Time Preference Shocks,” MPRA (The Munich Personal RePEc Archive) Paper No. 60205.

Harashima, Taiji (2015) “Bubbles, Bluffs, and Greed,” Theoretical and Practical Research in Economic Fields, Vol. 6, No. 1, pp. 29-56.

Harashima, Taiji (2017) “Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 51, No.1, pp. 31-80.（原嶋　耐治 「持続可能な非均質性―均質ではない構成員からなる経済における不平等、経済成長及び社会的厚生―」、『金沢星稜大学論集』第51巻第1号（通巻130号）、31～80頁）

Harashima, Taiji (2018a) “Bubbles and Bluffs: Risk Lovers Can Survive Economically,” MPRA (The Munich Personal RePEc Archive) Paper No. 83615.

Harashima, Taiji (2018b) “Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 51, No.2, pp. 71-10. （原嶋　耐治「パレート非効率な移行経路を選択する戦略からなるナッシュ均衡としての恐慌」、『金沢星稜大学論集』第51巻第2号（通巻131号）、71～101頁）

Kaldor, Nicholas (1957) “A Model of Economic Growth,” The Economic Journal, Vol. 67, No. 268, pp. 591–624.

Lucas, Robert E Jr. (1972) “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, pp.103-124.

Marcet, Albert and Thomas J. Sargent (1989) “Convergence of Least Squares Learning Mechanisms in Self-referential Linear Stochastic Models,” Journal of Economic Theory, Vol. 48, No. 2, pp. 337-368.

Muth, John F. (1961) “Rational Expectations and the Theory of Price Movements,” Econometrica, Vol. 29, No. 3, pp. 315-335.

Piketty, Thomas (2013) Le Capital au XXIe siècle translated by Arthur Goldhammer in English in 2014 with the title Capital in the twenty-First Century Capital in the Twenty-First Century, Belknap Press of Harvard University Press, Cambridge, MA.

Romer Paul M. (1986) “Increasing Returns and Long-Run Growth,” The Journal of Political Economy, Vol. 94, No. 5, pp. 1002-1037.

Sargent, Thomas J., David Fand and Stephen Goldfeld (1973) “Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment,” Brookings Papers on Economic Activity, Vol. 1973, No.2, pp.429-480.

Smith, Adam (1776) The Wealth of Nations.

Solow, Robert M. (1956) “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics, Vol. 70, No. 1, pp. 65-94.