Getting rid of ergodicity in forecasting
Roger Farmer is asking whether it is possible to construct a macroeconomic theory that allows for more sophisticated individual behaviors but does not preserve the constraints of the representative agent approach. He argues that what mainstream economists are missing is that the future behavior of prices and quantities may not be governed by stationary probability laws, even if the fundamentals of the economy are governed by such laws.
Ergodicity
By: Roger Farmer – University of Warwick
Nonlinearities and future behavior of asset prices
Hansen and Sargent provide a formal analytical structure where investors are confronted with uncertainty about the future of macroeconomic growth in a stylized way. An example of such uncertainty could be the possibility but not the certainty of secular stagnation, or the uncertainty about growth impacts of future technological advances. They find that prices of uncertainty fluctuate because investors especially fear high persistence of macroeconomic growth in bad states and fear low persistence in good ones. This mechanism induces an endogenous nonlinearity into the underlying asset valuations. This nonlinearity compounds over time in ways that provide a novel explanation for how asset market fluctuations reflect uncertainty.
The Price of Macroeconomic Uncertainty with Tenuous Beliefs
Authors: Lars Peter Hansen, Thomas J. Sargent
From: University of Chicago, New York University
“Model doesn’t work in reality? Assume reality doesn’t exist!”
Economic models reduce uncertainty to risk but as Keynes argued in his Treatise on Probability (1921), this is not always possible.
Keynesian uncertainty
By: Lars Syll – Malmö University
