Rational expectations and econometric practice, by Robert E. Lucas Jr., Thomas J. Sargent

By Robert E. Lucas Jr., Thomas J. Sargent

Rational expectancies and Econometric perform was once first released in 1981. Minnesota Archive variants makes use of electronic know-how to make long-unavailable books once more obtainable, and are released unaltered from the unique college of Minnesota Press editions.

Assumptions approximately how humans shape expectancies for the longer term form the homes of any dynamic financial version. To make fiscal judgements in an doubtful setting humans needs to forecast such variables as destiny charges of inflation, tax charges, executive subsidy schemes and laws. The doctrine of rational expectancies makes use of commonplace fiscal how you can clarify how these expectancies are formed.

This paintings collects the papers that experience made major contributions to formulating the assumption of rational expectancies. many of the papers care for the connections among saw monetary habit and the assessment of other fiscal policies.

Robert E. Lucas, Jr., is professor of economics on the collage of Chicago. Thomas J. Sargent is professor of economics on the collage of Minnesota and adviser to the Federal Reserve financial institution of Minnesota.

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L" The pri cing kern el is restrict ed to two alte rnative specifications: i ) a relatively restrictive pricing kern el with constant elasticity and ii ) a relati vely flexible polynomial 16 See also Forn ar i and Mele [69) for a relat ed approach . However , they analyze futures written on Italian govern ment b onds. 1 Empirical Lit erature 33 approximation. e, the pr icing kernel is not monotonically decreasing. In terms of a represent ative investor this implies locally increasing marginal utility.

From the CAPM to the intertemporal behaviour of asset prices Any survey on asset pricing starts with the seminal Capital Asset Pricing Model (CAPM) developed by Lintner [125], Mossin [144] and Sharpe [174]. 1) . P" However, the CAPM is a one-period model and therefore not suited to explain asset prices in an intertemporal context. In the 70's and the 80's, articles discussed conditions under which a sequence of one-period models would be equivalent to an intertemporal model (see for example Bhattacharya [12] and Constantinides [43], [44]).

The empirical results ar e still very cont roversial, especially for methodological reasons. However , t hese st udies point out that it might be possible to use information eit her on past ret urns or other explanato ry variables as the book-to-market ratio to pr edict future asse t returns. This is in contrast to the assumption th at asset pri ces are governe d by a geometric Br ownian motion. Finally, also th e empirical pricing kernels are at odds with t he assumption that asset pri ces ar e governe d by a geometric Br owni an moti on.

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