Assessing Rational Expectations

In this book Roger Guesnerie contributes to the critical assessment of
the Rational Expectations hypothesis (REH). He focuses on the multiplicity question
that arises in (infinite horizon) Rational Expectation models and considers the
implications for a theory of endogenous fluctuations. The REH, which dominates the
economic modeling of expectations in most fields of formalized economic theory, is
often associated with an optimistic view of the working of the markets--a view that
Guesnerie scrutinizes closely.The book is divided into four parts. The first part
uses the framework of simple models to characterize the stochastic processes that
trigger self-fulfilling prophecies and examines the connections between periodic
equilibria (cycles) and stochastic equilibria (sunspots). (A sunspot is a random
shock uncorrelated with underlying economic fundamentals.) The second part views
sunspot equilibria as overreactions triggered by small variations of intrinsic
variables--rather than as fluctuations with no trigger--and looks at the
consequences for a monetary theory à la Lucas. The third part develops the basic
theory to encompass more complex, multidimensional systems. It focuses in particular
on the special class of equilibria generating small fluctuations around a steady
state. Broadening the scope, the fourth part looks at the stability of cycles,
sunspots in systems with memory, and current research on rational
expectations.