lecture3 - Economics 202A Lecture III Fall 2007 The problem...

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1 Economics 202A Lecture III Fall 2007 The problem set on Lucas and Sargent will be due next Tuesday. In addition you will owe me your second log. We are going to do two things in this class. 1. I will go over the reading list, with a bit of emphasis on the first readings on rational expectations. 2. Then I will go over the first real economics article on the reading list. I am now going to go over the reading list, which I have not done so far because I thought it was more important last week that we get a start on substantive material. So let&s go over the reading list. If you have one with you please use that. I have made a copy of one reading list for every two people, so I will pass out new copies, but I want you to share. Let me now go over the reading list. [Hand out copies.] We have just covered the first section of the reading list. In the first lecture I gave a review of the basic Keynesian model. Then I reviewed math background that you should know in the second lecture. and then I gave a review of a basic Keynesian model. We have also covered the mathematical background to the course, which is difference equations and ARMA processes. By now you should have done the reading on Time Series Processes. If you have not done so this is a reminder to make you feel guilty. macroeconomics. If you have not done that you should be sure to do that. This takes us to section II of the Reading List±on equilibrium concepts. Robert Lucas and Tom Sargent posed a very interesting problem for economics in
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2 the 1970’s. They showed that if people have rational expectations and if labor markets are basically clearing, then monetary policies that react to unemployment or inflation are no more stabilizing than monetary policies that are purely neutral. The only important part of monetary policy is the unexpected part. Any systematic and their actions will counteract it. Let±s look at a very simple view of their proposition. Suppose that you and I are playing a game, and you get a reward that is reduced by the deviation between the number you name and the number that I name. Then it does not matter what rule I have for generating my number since you will simply copy it. Suppose that I name the number f(t) + v where v is the zero-mean random part and f(t) is the systematic part. Suppose you know the rule f(t). You can learn the systematic part of my rule. Then your best rule is to name f(t). And the deviation from exact matching of the numbers is v. It does not matter what my choice of f(t) is. With
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This note was uploaded on 08/01/2008 for the course ECON 202A taught by Professor Akerlof during the Fall '07 term at Berkeley.

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lecture3 - Economics 202A Lecture III Fall 2007 The problem...

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