Rational expectations and economic theory , Microeconomics

Assignment Help:

RATIONAL EXPECTATIONS AND ECONOMIC THEORY:

We assumed above that the role of economic theory is not to provide quantitative predictions about the future. Suppose we assume instead that the primary role economic theory is the prediction of future values of variables of interest. Also, give this role of economic theory, suppose we stipulate that under any particular set of circumstances, the choice amongst alternative theoretical models should be possible on the basis of quantitative historical data alone. It implies that models should provide/predictions in the form of relations between objectively measurable variables, predictions which can be checked using past data on these variables.

Note also that the above assumption implies any one of two things:

i) the same relation between variables have prevailed for the times and places that the past data relates to and will prevail under the present circumstances, or

ii) differences in time and space can be accounted for as different values of quantifiable variables within the model.

Therefore, once a model is chosen on the basis it can be assumed to provide, together with historical data on the variable in the model, objective quantitative predictions. Traditionally, this has meant that models have been used to yield predictions in the form of an objective probability distribution for the future values of dependent variables, given (conditioned on) current and past values of a set of variables.

This objective conditional probability distribution has been derived by econometric methods on the basis of past data on the variables appearing in relationships derived from theory. The basic assumption underlying such an approach is that either there is an objective conditional probability distribution relating these variables which does not change with time and space or that time and span ban themselves be specified in terms of quantifiable variables in the model.


Related Discussions:- Rational expectations and economic theory

1, Find the market-clearing price and quantity of burritos.

Find the market-clearing price and quantity of burritos.

Determine the units of capital and labour, The production function for a fi...

The production function for a firm is expressed as follows: Q = 800K - K 2 +5KL - 7750L + 10,000 Where Q is quantity of units manufactured, K and L are units of capital and

Define the generality of economic theory in modern economics, Define the ge...

Define the generality of economic theory in the modern economics. Generality of Economic Theory An economic theory is based onto assumptions imposed onto economic environmen

Time serie, uses of time series in indian economy

uses of time series in indian economy

Explain the monopolistic excess capacity, Theories of Chamberlin’s monopoli...

Theories of Chamberlin’s monopolistic competition and Joan Robinson’s imperfect competition have revealed that a firm under monopolistic competition or imperfect competition in lon

Neoclassical economics, In neoclassical economics, equilibrium exists when ...

In neoclassical economics, equilibrium exists when supply equals demand for a particular commodity. General equilibrium is a special (purely hypothetical) condition in which every

Competitive short run supply curve of firm and industry, A Competitive Shor...

A Competitive Short Run Supply Curve of Firm * Observations: - P = MR - MR = MC - P = MC * Supply is amount of output for every possible price.  Thus: -  If

Sources of economic growth, Sources of Economic growth: Human resourc...

Sources of Economic growth: Human resources: Investment in human capital is considered as an important factor for economic growth. This is done by increasing the quality of

Utility approach, Prove that utility approach and indifference curve yield ...

Prove that utility approach and indifference curve yield the same consumer equilibrium

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd