The Influential Expectations Hypothesis is here

Posted: January 17, 2015 in Research papers
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That was a nice way to start the year. My paper  Vintage megaphone“Introducing the Influential Expectations Hypothesis for Aggregate Expectations, with an application to the Optimal Growth model”, which is essentially the first part of my PhD (still in progress of course), was one of the three papers that received an award from KEPE in a competition among papers that contained unpublished research from ongoing or finished PhDs. And today was the ceremony of the thing (I guess KEPE will issue a press release for the matter in the following days). The three awards were of equal standing.

What is “Influential Expectations Hypothesis(IEH)? In short, a new Hypothesis on how aggregate expectations on economic variables are formed.

Why should we care? For three reasons: [1] The global economic system as well as national economies are clearly not in a state of “long-run equilibrium” in the last 25 years. This means that we need models that deal adequately with short-run dynamics and economies in transition. [2] The recent global “Debt crisis” highlighted once more the importance of Expectations in bringing about wild fluctuations and crises. [3] The current Hypotheses we use (predominantly Rational Expectations but not only), are either not too friendly towards short-run dynamics, or too quickly come to rely exclusively on simulations in order to solve the models (respectable, but I always had a thing for analytic solutions).

[1],[2],[3]=> Try new expectations formation hypotheses (among other directions of research).

And this is what I did with IEH. Being a foundational subject, it has applicability to any stochastic macroeconomic model whatsoever -this means that [a] it can be exhaustively tested at the theoretical level and see whether it produces new/different results and [b] it can then be exhaustively tested against the data. Will it stand these tests? This is what I am going to find out. Its application on the most basic Optimal Growth model produced indeed new results, and my problem now is to choose the next step from all these  possibilities for theoretical and empirical application. But that’s a good problem to have.

Tom Waits megaphone Since I will submit the paper for publication in peer-reviewed journals, I stop short of describing what the Influential Expectations Hypothesis actually assumes, but of course, the two great pictures here (the vintage and the Tom Waits one), have something to do with it.

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