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A Rational Expectations Approach to Macroeconomics: Testing Policy Ineffectiveness and Efficient-Markets Models

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  • Economics

Abstract

Does Anticipated Aggregate Demand Policy Matter? This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: A Rational Expectations Approach to Macroeconomics: Testing Policy Ineffectiveness and Efficient-Markets Models Volume Author/Editor: Frederic S. Mishkin Volume Publisher: University of Chicago Press Volume ISBN: 0-226-53186-4 Volume URL: http://www.nber.org/books/mish83-1 Publication Date: 1983 Chapter Title: Does Anticipated Aggregate Demand Policy Matter? Chapter Author: Frederic S. Mishkin Chapter URL: http://www.nber.org/chapters/c10248 Chapter pages in book: (p. 110 - 155) 6 Does Anticipated Aggregate Demand Policy Matter? 6.1 Introduction Recent theorizing has focused on business cycle models that incorpo- rate features of the natural rate model of Friedman (1968) and Phelps (1967) with the assumption that expectations are rational in the sense of Muth (1961). An important neutrality result from this research (Lucas 1973; Sargent and Wallace 1975) is that anticipated changes in aggregate demand policy will have been taken into account already in the behavior of economic agents and will evoke no further output or employment response. Therefore, deterministic, feedback policy rules \\'ill have no effect on output fluctuations in the economy. This policy ineffectiveness proposition of what Modigliani (1977) has dubbed the Macro Rational Expectations (MRE) hypothesis runs counter to much previous mac- roeconomic theorizing (and to views prevailing in policymaking circles). This proposition is of such importance that it demands a wide range of empirical research for verification or refutation. This chapter applies the econometric methodology developed in Chap- ter 2 to the important question whether anticipated aggregate demand policy matters to the business cycle. It begins with a brief review of the methodology in Section 6.2, then follows with the empirical results in Section 6.3, and ends with a s

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