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The Conquest of American Inflation - Thomas J. Sargent

The Conquest of American Inflation

Paperback

Published: 1st November 2001
For Ages: 13+ years old
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In the past fifteen years, inflation has been conquered by many advanced countries. History reveals, however, that it has been conquered before and returned. In "The Conquest of American Inflation, " Thomas J. Sargent presents a groundbreaking analysis of the rise and fall of U.S. inflation after 1960. He examines two broad explanations for the behavior of inflation and unemployment in this period: the natural-rate hypothesis joined to the Lucas critique and a more traditional econometric policy evaluation modified to include adaptive expectations and learning. His purpose is not only to determine which is the better account, but also to codify for the benefit of the next generation the economic forces that cause inflation.

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 curve--the inverse relationship between inflation and unemployment. In subsequent chapters, he connects a sequence of ideas--self-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.

"This book illustrates Sargent's great curiosity and honesty... [Here] the reader gets a lucid, penetrating inquiry into the "ifs and buts" of rational expectations (RE) and their implications for policy."--Peter Sinclair, The Times Higher Education Supplement "A lucid, penetrating inquiry into the 'ifs and buts' of rational expectations and their implications for policy... This book illustrates Sargent's great curiosity and honesty ... A beautifully crafted, deep, and ... very accessible work... It deserves to be one of the century's most influential books on macroeconomics."--Peter Sinclair, Times Literary Supplement "A path-breaking contribution. It shows new ways to analyze dynamic economics. It is a basic reference to understand--and develop--dynamic macroeconomic theory in the 21st century."--Ramon Marimon, Journal of Economic Literature

Prefacep. xiii
The Rise and Fall of U.S. Inflationp. 1
Factsp. 1
Two interpretationsp. 1
The triumph of natural-rate theoryp. 2
The vindication of econometric policy evaluationp. 3
Readers's guidep. 6
The Lucas critiquep. 6
Time-consistency and credible plansp. 6
Adaptive expectations and the Phelps problemp. 7
Equilibrium under misspecificationp. 7
Two types of self-confirming equilibriap. 8
Adaptive expectationsp. 9
Empirical vindicationp. 11
Raw and filtered Datap. 11
Demographic adjustment and driftp. 13
Ignoring the Lucas Critiquep. 14
The Lucas critiquep. 14
Outlinep. 14
The appeal to drifting coefficientsp. 15
A loose endp. 16
Parameter drift as point of departurep. 17
Relevance of the critiquep. 17
Rational expectations modelsp. 19
The Credibility Problemp. 20
Introductionp. 20
One-period economyp. 20
Least squares learning converges to Nashp. 25
More foresightp. 27
Appendix on stochastic approximationp. 28
Credible Government Policiesp. 31
Perfectionp. 31
Historical antecedentsp. 33
The method of Abreu-Pearce-Stacchettip. 35
Examples of recursive SPEp. 38
Infinite repetition of Nash outcomep. 39
Infinite repetition of a better-than-Nash outcomep. 39
Something worse: a stick and carrot strategyp. 41
The worst SPEp. 42
Multiplicityp. 44
Attaining the worst, method 1p. 45
Attaining the worst, method 2p. 45
Attaining the worst, method 3p. 46
Numerical examplesp. 46
Interpretationsp. 48
Remediesp. 49
Adaptive Expectations (1950's)p. 50
Adaptive expectationsp. 50
The original Phelps problemp. 50
Phelps problem: general versionp. 53
Testing the natural-rate hypothesisp. 55
Disappearance of beliefs as state variablep. 57
Subversion of Phelps's modelp. 57
Optimal Misspecified Beliefsp. 59
Equilibrium with mistakesp. 59
An experiment in Bray's labp. 60
Misspecificationp. 62
Lessonsp. 67
Self-Confirming Equilibriap. 68
Two literaturesp. 68
Directions of fitp. 68
Imperfect (1970's) rational expectations equilibriap. 69
Self-confirming equilibriap. 69
Objects in Phelps problemp. 69
Elements of self-confirming modelsp. 70
The actual Phillips curvep. 70
Self-confirmationp. 71
Direction of minimizationp. 72
Vanishing parametersp. 73
Self-confirmation under classical directionp. 74
Moment formulasp. 74
Keynesian direction of fitp. 75
Government beliefs and behaviorp. 75
Calculation of Sp. 76
Special case by handp. 77
Why not Ramsey?p. 79
Direction of minimization: cautionp. 80
Equilibrium computationp. 80
Messagesp. 81
Equilibrium with misspecified beliefsp. 81
An erroneous forecasting functionp. 82
Approaching Ramseyp. 84
Grounds for optimismp. 86
Adaptive Expectations (1990's)p. 87
Least squares adaptationp. 87
Primer on recursive algorithmsp. 88
Iterationp. 89
Stochastic approximationsp. 90
Mean dynamicsp. 90
Constant gainp. 91
Escape routesp. 92
Simplification of action functionalp. 93
From computation to adaptationp. 94
Adaptation with the classical identificationp. 95
The government's beliefs and behaviorp. 95
RLS and the Kalman filterp. 96
Private sector beliefsp. 97
System evolutionp. 98
Mean dynamicsp. 98
Stochastic approximationp. 99
Adaptation with Keynesian identificationp. 101
Government beliefs and behaviorp. 101
Technical detailsp. 102
Simulationsp. 102
Classical adaptive simulationsp. 103
Relation to equilibria under forecast misspecificationp. 110
Simulation with Keynesian adaptationp. 111
Role of discount factorp. 114
Conclusionsp. 114
RLS and the Kalman filterp. 115
The Kalman filterp. 115
Recursive least squaresp. 116
Matching RLS to the Kalman filterp. 117
Initial conditions for simulationsp. 118
Anticipated utilityp. 119
Boiler plate recursive rational expectations modelp. 119
Anticipated utility modelp. 120
Econometric Policy Evaluationp. 122
Introductionp. 122
Likelihood functionp. 122
Estimatesp. 124
Interpretationp. 127
Appendix on likelihood functionp. 128
Triumph or Vindication?p. 130
Expectations and the Lucas critiquep. 130
Reservationsp. 133
Glossaryp. 135
Referencesp. 137
Author Indexp. 145
Subject Indexp. 147
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780691090122
ISBN-10: 0691090122
Audience: Tertiary; University or College
For Ages: 13+ years old
Format: Paperback
Language: English
Number Of Pages: 168
Published: 1st November 2001
Country of Publication: US
Dimensions (cm): 23.17 x 15.39  x 1.3
Weight (kg): 0.27