Rethinking Expectations

Which Way Forward for Macroeconomics and Policy Analysis? 1 Roman Frydman and Edmund S. Phelps PART ONE Back to the Foundations 1 Expectational Coordination Failures and Market Volatility 49 Roger Guesnerie 2 Learning as a Rational Foundation for Macroeconomics and Finance 68 George W. Evans and Seppo Honkapohja 3 Keynes on Knowledge, Expectations, and Rationality 112 Sheila Dow 4 The Imperfect Knowledge Imperative in Modern Macroeconomics and Finance Theory 130 Roman Frydman and Michael D. Goldberg PART TWO Autonomous Expectations in Long Swings in Asset Prices 5 Heterogeneous Gain Learning and Long Swings in Asset Prices 169 Blake LeBaron 6 Opening Models of Asset Prices and Risk to Nonroutine Change 207 Roman Frydman and Michael D. Goldberg PART THREE Rethinking Unemployment-Inflation Trade-offs and the Natural Rate Theory 7 Animal Spirits, Persistent Unemployment, and the Belief Function 251 Roger E. A. Farmer 8 Indeterminacies in Wage and Asset Price Expectations 277 Edmund S. Phelps 9 The Long Swings of Employment, Investment, and Asset Prices 301 Gylfi Zoega 10 Imperfect Knowledge, Asset Price Swings, and Structural Slumps 328 Katarina Juselius 11 Stabilization Policies and Economic Growth 351 Philippe Aghion and Enisse Kharroubi PART FOUR Policymaking after "Rational Expectations" 12 Swings and the Rules-Discretion Balance 373 John B. Taylor 13 Principled Policymaking in an Uncertain World 389 Michael Woodford Contributors 415 Index 421

Roman Frydman is professor of economics at New York University and the coauthor (with Michael D. Goldberg) of Beyond Mechanical Markets and Imperfect Knowledge Economics. Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, is director of Columbia University's Center on Capitalism and Society. His many books include Structural Slumps and Seven Schools of Macroeconomic Thought.

"Microeconomic Foundations of Employment and Inflation Theory, edited by Edmund Phelps forty years ago, established the concept of 'micro foundations' as an essential macroeconomics idea. Later, 'rational expectations' was added as the second pillar of the current standard macro model. Recent events have challenged the validity of that model. This new Phelps volume, coedited with Roman Frydman, challenges and offers alternatives to the second pillar while retaining the first. It is a must-read for anyone interested in modern economic thought and its implications for policy."--Dale Mortsensen, Nobel Laureate in Economics