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Overview
Sargent begins with an explanation of how American policymakers increased inflation in the early 1960s by following erroneous assumptions about the exploitability of the Phillips curvethe inverse relationship between inflation and unemployment. In subsequent chapters, he connects a sequence of ideasself-confirming equilibria, least-squares and other adaptive or recursive learning algorithms, convergence of least-squares learners with self-confirming equilibria, and recurrent dynamics along escape routes from self-confirming equilibria. Sargent synthesizes results from macroeconomics, game theory, control theory, and other fields to extend both adaptive expectations and rational expectations theory, and he compellingly describes postwar inflation in terms of drifting coefficients. He interprets his results in favor of adaptive expectations as the relevant mechanism affecting inflation policy.
Providing an original methodological link between theoretical and policy economics, this book will engender much debate and become an indispensable text for academics, graduate students, and professional economists.
Product Details
ISBN-13: | 9780691090122 |
---|---|
Publisher: | Princeton University Press |
Publication date: | 12/02/2001 |
Edition description: | Reprint |
Pages: | 168 |
Product dimensions: | 6.00(w) x 9.25(h) x (d) |
About the Author
Table of Contents
Preface | xiii | |
1. | The Rise and Fall of U.S. Inflation | 1 |
Facts | 1 | |
Two interpretations | 1 | |
The triumph of natural-rate theory | 2 | |
The vindication of econometric policy evaluation | 3 | |
Readers's guide | 6 | |
The Lucas critique | 6 | |
Time-consistency and credible plans | 6 | |
Adaptive expectations and the Phelps problem | 7 | |
Equilibrium under misspecification | 7 | |
Two types of self-confirming equilibria | 8 | |
Adaptive expectations | 9 | |
Empirical vindication | 11 | |
Raw and filtered Data | 11 | |
Demographic adjustment and drift | 13 | |
2. | Ignoring the Lucas Critique | 14 |
The Lucas critique | 14 | |
Outline | 14 | |
The appeal to drifting coefficients | 15 | |
A loose end | 16 | |
Parameter drift as point of departure | 17 | |
Relevance of the critique | 17 | |
Rational expectations models | 19 | |
3. | The Credibility Problem | 20 |
Introduction | 20 | |
One-period economy | 20 | |
Least squares learning converges to Nash | 25 | |
More foresight | 27 | |
Appendix on stochastic approximation | 28 | |
4. | Credible Government Policies | 31 |
Perfection | 31 | |
Historical antecedents | 33 | |
The method of Abreu-Pearce-Stacchetti | 35 | |
Examples of recursive SPE | 38 | |
Infinite repetition of Nash outcome | 39 | |
Infinite repetition of a better-than-Nash outcome | 39 | |
Something worse: a stick and carrot strategy | 41 | |
The worst SPE | 42 | |
Multiplicity | 44 | |
Attaining the worst, method 1 | 45 | |
Attaining the worst, method 2 | 45 | |
Attaining the worst, method 3 | 46 | |
Numerical examples | 46 | |
Interpretations | 48 | |
Remedies | 49 | |
5. | Adaptive Expectations (1950's) | 50 |
Adaptive expectations | 50 | |
The original Phelps problem | 50 | |
Phelps problem: general version | 53 | |
Testing the natural-rate hypothesis | 55 | |
Disappearance of beliefs as state variable | 57 | |
Subversion of Phelps's model | 57 | |
6. | Optimal Misspecified Beliefs | 59 |
Equilibrium with mistakes | 59 | |
An experiment in Bray's lab | 60 | |
Misspecification | 62 | |
Lessons | 67 | |
7. | Self-Confirming Equilibria | 68 |
Two literatures | 68 | |
Directions of fit | 68 | |
Imperfect (1970's) rational expectations equilibria | 69 | |
Self-confirming equilibria | 69 | |
Objects in Phelps problem | 69 | |
Elements of self-confirming models | 70 | |
The actual Phillips curve | 70 | |
Self-confirmation | 71 | |
Direction of minimization | 72 | |
Vanishing parameters | 73 | |
Self-confirmation under classical direction | 74 | |
Moment formulas | 74 | |
Keynesian direction of fit | 75 | |
Government beliefs and behavior | 75 | |
Calculation of S | 76 | |
Special case by hand | 77 | |
Why not Ramsey? | 79 | |
Direction of minimization: caution | 80 | |
Equilibrium computation | 80 | |
Messages | 81 | |
Equilibrium with misspecified beliefs | 81 | |
An erroneous forecasting function | 82 | |
Approaching Ramsey | 84 | |
Grounds for optimism | 86 | |
8. | Adaptive Expectations (1990's) | 87 |
Least squares adaptation | 87 | |
Primer on recursive algorithms | 88 | |
Iteration | 89 | |
Stochastic approximations | 90 | |
Mean dynamics | 90 | |
Constant gain | 91 | |
Escape routes | 92 | |
Simplification of action functional | 93 | |
From computation to adaptation | 94 | |
Adaptation with the classical identification | 95 | |
The government's beliefs and behavior | 95 | |
RLS and the Kalman filter | 96 | |
Private sector beliefs | 97 | |
System evolution | 98 | |
Mean dynamics | 98 | |
Stochastic approximation | 99 | |
Adaptation with Keynesian identification | 101 | |
Government beliefs and behavior | 101 | |
Technical details | 102 | |
Simulations | 102 | |
Classical adaptive simulations | 103 | |
Relation to equilibria under forecast misspecification | 110 | |
Simulation with Keynesian adaptation | 111 | |
Role of discount factor | 114 | |
Conclusions | 114 | |
Appendix A | RLS and the Kalman filter | 115 |
The Kalman filter | 115 | |
Recursive least squares | 116 | |
Matching RLS to the Kalman filter | 117 | |
Initial conditions for simulations | 118 | |
Appendix B | Anticipated utility | 119 |
Boiler plate recursive rational expectations model | 119 | |
Anticipated utility model | 120 | |
9. | Econometric Policy Evaluation | 122 |
Introduction | 122 | |
Likelihood function | 122 | |
Estimates | 124 | |
Interpretation | 127 | |
Appendix on likelihood function | 128 | |
10. | Triumph or Vindication? | 130 |
Expectations and the Lucas critique | 130 | |
Reservations | 133 | |
Glossary | 135 | |
References | 137 | |
Author Index | 145 | |
Subject Index | 147 |
What People are Saying About This
The Conquest of American Inflation is a fascinating document, marshalling sophisticated economic theory and econometrics to the task of explaining the past 50 years of U.S. monetary policy and its interaction with macroconomic activity. It will surely be widely cited and widely discussed.
Robert King, University of Virginia
A very deep and very subtle piece of scholarship.... Sargent is most impressive in his ability to bring theoretical arguments to bear on the problem of distinguishing empirically between the two histories of postwar inflation.
Thomas F. Cooley, University of Rochester
A fascinating study of a real-world phenomenon that uses ideas from recent theoretical work on bounded rationality. Brilliant and pathbreaking.
David Kreps, Stanford University
"A brilliant technical treatise that includes both new results and original synthesis. . . . The Conquest of American Inflation may help to fashion a new paradigm in macroeconomic analysis."—Ben Bernanke, Princeton University"A very deep and very subtle piece of scholarship.... Sargent is most impressive in his ability to bring theoretical arguments to bear on the problem of distinguishing empirically between the two histories of postwar inflation."—Thomas F. Cooley, University of Rochester"The Conquest of American Inflation is a fascinating document, marshalling sophisticated economic theory and econometrics to the task of explaining the past 50 years of U.S. monetary policy and its interaction with macroconomic activity. It will surely be widely cited and widely discussed."—Robert King, University of Virginia"A fascinating study of a real-world phenomenon that uses ideas from recent theoretical work on bounded rationality. Brilliant and pathbreaking."—David Kreps, Stanford University
A brilliant technical treatise that includes both new results and original synthesis. . . . The Conquest of American Inflation may help to fashion a new paradigm in macroeconomic analysis.
Ben Bernanke, Princeton University