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An Interview with Thomas J. Sargent

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sargentinterview9wp.dvi An Interview with Thomas J. Sargent∗ George W. Evans Department of Economics University of Oregon email: [email protected] and Seppo Honkapohja Faculty of Economics and Politics University of Cambridge email: [email protected] January 11, 2005 The rational expectations hypothesis swept through macroeconomics dur- ing the 1970’s and permanently altered the landscape. It remains the prevail- ing paradigm in macroeconomics, and rational expectations is routinely used as the standard solution concept in both theoretical and applied macroeco- nomic modelling. The rational expectations hypothesis was initially formu- lated by John F. Muth Jr. in the early 1960s. Together with Robert Lucas Jr., Thomas (Tom) Sargent pioneered the rational expectations revolution in macroeconomics in the 1970s. Possibly Sargent’s most important work in the early 1970’s focused on the implications of rational expectations for empirical and econometric re- search. His short 1971 paper “A Note on the Accelerationist Controversy” provided a dramatic illustration of the implications of rational expectations by demonstrating that the standard econometric test of the natural rate hy- pothesis was invalid. This work was followed in short order by key papers that ∗This interview is forthcoming in Macroeconomic Dynamics. 1 showed how to conduct valid tests of central macroeconomic relationships un- der the rational expectations hypothesis. Imposing rational expectations led to new forms of restrictions, called “cross-equation restrictions,” which in turn required the development of new econometric techniques for the study of macroeconomic relations and models. Tom’s contributions were wide ranging. His early econometric work in the 1970s includes studies of the natural rate of unemployment, the neutrality of real interest rates with respect to money, dynamic labor demand, empirics of hyperinflation, and tests for the neutrality of money in “classical” rational expectations models

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