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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.

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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.”

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