Rational Expectations and Inflation

by Thomas J. Sargent

A fully expanded edition of the Nobel Prize-winning economist's classic bookThis collection of essays uses the lens of rational expectations theory to examine how governments anticipate and plan for inflation, and provides insight into the pioneering research for which Thomas Sargent was awarded the 2011 Nobel Prize in economics. Rational expectations theory is based on the simple premise that people will use all the information available to them in making economic decisions, yet applying the theory to macroeconomics and econometrics is technically demanding. Here, Sargent engages with practical problems in economics in a less formal, noneconometric way, demonstrating how rational expectations can satisfactorily interpret a range of historical and contemporary events. He focuses on periods of actual or threatened depreciation in the value of a nation's currency. Drawing on historical attempts to counter inflation, from the French Revolution and the aftermath of World War I to the economic policies of Margaret Thatcher and Ronald Reagan, Sargent finds that there is no purely monetary cure for inflation; rather, monetary and fiscal policies must be coordinated.This fully expanded edition of Rational Expectations and Inflation includes Sargent's 2011 Nobel lecture, United States Then, Europe Now. It also features new articles on the macroeconomics of the French Revolution and government budget deficits.

Genres: Economics

Paperback

First published January 1, 1986

Reviews

[Fizza · Rating 3 out of 5]

This book provides and interesting take on rational expectations implications for macroeconomic policy when viewed in light of historical events.

[Henry · Rating 5 out of 5]

- The author takes a look at the monetary policy of many post WW2 nations that experienced hyperinflation (namely, Germany, Austria, Poland and Hungary) and the bordering country that didn't experience hyperinflation (Czechoslovakia) and finds that:

- The hyperinflated countries all lack of financial discipline post war. In addition, their currencies were unbacked by any monetary instrument. However, the biggest difference between today's FIAT currency and the Austria-Hungary FIAT currency was due to the war, the latter countries don't have the ability to productively produce food, thus relying upon import but doesn't have the means to pay for such import

- Czechoslovakia however, did not experience hyperinflation due to the financial discipline as well as a hard monetary instrument backing such currency

- Hyperinflation ended for thus countries rather abruptly, by simplifying laying out plans to 1) cut governmental bloat and 2) increase taxation. The ironic part, the author noted, was that as soon as people learned those plans are set, they begin acting if hyperinflation is over (even though the printing press was still running when the plans were set). Thus, people's mindset is very important in the hyperinflation debate

- The author noted that while some scholar dismiss those episode as "too extreme", author believes that extreme episode ought to be studied more since if we can apply the lesson from extreme examples, we can apply the lesson for mild examples too