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Rational Expectations and Inflation (Third Edition)

Rational Expectations and Inflation (Third Edition)

Thomas J. Sargent
Copyright Date: 2013
Pages: 392
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  • Book Info
    Rational Expectations and Inflation (Third Edition)
    Book Description:

    This collection of essays uses the lens of rational expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which Thomas Sargent was awarded the 2011 Nobel Prize in economics. Rational expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. Here, Sargent engages with practical problems in economics in a less formal, noneconometric way, demonstrating how rational expectations can satisfactorily interpret a range of historical and contemporary events. He focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, Sargent finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated.

    This fully expanded edition ofRational Expectations and Inflationincludes Sargent's 2011 Nobel lecture, "United States Then, Europe Now." It also features new articles on the macroeconomics of the French Revolution and government budget deficits.

    eISBN: 978-1-4008-4764-8
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. List of Figures
    (pp. xi-xii)
  4. List of Tables
    (pp. xiii-xiv)
  5. Acknowledgements
    (pp. xv-xvi)
  6. Preface to the Third Edition
    (pp. xvii-xviii)
    Thomas J. Sargent
  7. Preface to the Second Edition
    (pp. xix-xx)
    Thomas J. Sargent
  8. Preface to the First Edition
    (pp. xxi-xxiv)
    Thomas J. Sargent
  9. 1 Rational Expectations and the Reconstruction of Macroeconomics
    (pp. 1-16)

    In order to provide quantitative advice about the effects of alternative economic policies, economists have constructed collections of equations known aseconometric models.¹ For the most part these models consist of equations that attempt to describe the behavior of economic agents—firms, consumers, and governments—in terms of variables that are assumed to be closely related to their situations. Such equations are often calleddecision rulesbecause they describe the decisions people make about things like consumption rates, investment rates, and portfolios as functions of variables that summarize the information people use to make those decisions. For all of their...

  10. 2 Reaganomics and Credibility
    (pp. 17-37)

    An offensive football team is a collection of individuals with a common objective: to score a touchdown. This objective is attained by the cooperation of eleven players, each of whom is ultimately in control of his own actions. The effectiveness of any one player’s actions depends intricately on the actions of his teammates. If the quarterback decides to throw the ball 30 yards downfield to the right side on a count of three, it is necessary for success that a receiver run a pass pattern that will place him in a position to catch the ball. If the quarterback calls...

  11. 3 The Ends of Four Big Inflations
    (pp. 38-110)

    Since the middle 1960s, many Western economies have experienced persistent and growing rates of inflation. Some prominent economists and statesmen have been convinced that this inflation has a stubborn, self-sustaining momentum and that either it simply is not susceptible to cure by conventional measures of monetary and fiscal restraint or, in terms of the consequent widespread and sustained unemployment, the cost of eradicating inflation by monetary and fiscal measures would be prohibitively high. It is often claimed that there is an underlying rate of inflation that responds slowly, if at all, to restrictive monetary and fiscal measures.¹ Evidently, this underlying...

  12. 4 Stopping Moderate Inflations: The Methods of Poincaré and Thatcher
    (pp. 111-161)

    In June 1979 Margaret Thatcher’s administration began governing Great Britain. One of her primary goals was markedly to reduce the rate of inflation, an understandable goal in view of the experience of the past decade when Great Britain’s rate of inflation had on average exceeded the rate of inflation in other industrial countries. Advocates of the two main groups of contemporary theories about inflation dynamics could have told Mrs. Thatcher that achieving that goal would be difficult, although each group would have characterized the nature of the difficulties quite differently. The first group consists of the “momentum” or “core inflation”...

  13. 5 Some Unpleasant Monetarist Arithmetic
    (pp. 162-196)
    Neil Wallace

    This chapter is a variation on the theme that monetary and fiscal policies are interrelated and must necessarily be coordinated. They must be coordinated because the monetary authority controls the rate of seigniorage from money creation, which is a revenue source in the government’s budget. The issue of coordination arises when one seeks to answer the following question: Is it possible for monetary policy permanently to influence an economy’s inflation rate? The answer to this question hinges on how monetary and fiscal policies are imagined to be coordinated. On the one hand, one can imagine a monetary authority sufficiently powerful...

  14. 6 Interpreting the Reagan Deficits
    (pp. 197-210)

    Figures on government deficits are difficult to interpret because the economically relevant budget constraint is an intertemporal one. As such, it restricts the present value of a sequence of government deficits but not the size of deficits for particular years or even for long strings of years. For any observed string of government deficits, there always exists a string of prospective future surpluses that renders the budget in balance in the present value sense.

    By alluding to prospects for future government surpluses, anyone can therefore assert that a record of observed deficits is consistent with maintaining sound government credit and...

  15. 7 Speculations about the Speculation against the Hong Kong Dollar
    (pp. 211-227)
    David T. Beers and Neil Wallace

    In this chapter, we attempt to explain the Hong Kong dollar’s recent substantial depreciation, or its loss in value in terms of foreign exchange. This task is a challenge mainly because of the unusual monetary policy recently espoused by the government of Hong Kong. From 1974 until October 1983, the officially professed policy allowed both the quantity and the exchange value of Hong Kong currency to be determined by market forces (or tofloat). The subject is also interesting because current events in Hong Kong are so much affected by expectations, expectations about what will happen after 1997, the year...

  16. 8 Six Essays in Persuasion
    (pp. 228-247)

    This chapter consists of six essays that use “unpleasant monetarist arithmetic” to interpret events during the 1980s and 1990s in the United States and Brazil. During the 1980s, the United States took steps along a path upon which Brazil had travelled much further, a path along which interest-bearing government debt is growing as a percentage of GNP. The US government was able readily to borrow large amounts, and had far to go before the government’s budget constraint threatened to impose painful choices among the options of raising taxes, lowering government expenditures, or printing currency. Brazil found its ability to borrow...

  17. 9 Macroeconomic Features of the French Revolution
    (pp. 248-296)
    François R. Velde

    This chapter interprets the French Revolution from the vantage point of macroeconomic theories about government budget constraints. From 1688 to 1788, Britain won and France lost three of four wars. France recurrently defaulted on its debt, Britain did not. After 1688, Britain had reformed its institutions to allow it to raise enough taxes during peacetime to finance debts incurred in times of war, while France sustained institutions designed to constrain the king’s revenues. Modernizing forces in France wanted to eliminate government defaults and to smooth taxes and to strengthen France’s government by enhancing its access to capital markets. When King...

  18. 10 United States Then, Europe Now
    (pp. 297-338)

    I work in a macroeconomic tradition developed by John Muth, Robert E. Lucas, Jr., Edward C. Prescott, Finn Kydland, Nancy Stokey, and Neil Wallace. I use macroeconometric methods championed by Lars Peter Hansen and Christopher A. Sims. I interpret macroeconomic history in ways advanced by Irving Fisher, Milton Friedman, Anna Schwartz, and François Velde.¹,² To illustrate how these research traditions have shaped me, I tell how predicaments facing the European Union today remind me of constitutional decisions the United States faced not once, but twice.

    I begin with a simple expected present value model for government debt and explain how...

  19. References
    (pp. 339-356)
  20. Author Index
    (pp. 357-360)
  21. Subject Index
    (pp. 361-364)