Since the early 1970s, macroeconomists have come to rely on models that specify fully in advance how market participants might alter the ways in which they make decisions and how aggregate outcomes unfold over time. These models have encountered widespread empirical difficulties in explaining outcomes, most notably in financial markets. Macroeconomists have proposed a variety of explanations for these shortcomings, including irrationality and psychological biases on the part of market participants. This project jettisons existing macroeconomic and finance models’ core premise that an economist can fully specify in advance how the economy’s structure might change over time and opens macroeconomics and finance models to unanticipated structural change in order to understand market outcomes and the consequences of alternative economic policies.
Advancing Imperfect Knowledge Economics
This research project develops theoretically coherent models that are open to unforeseeable structural change and avoid the presumption that market participants are irrational.