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Equilibrium Models in EconomicsPurposes and Critical Limitations$
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Lawrence A. Boland

Print publication date: 2017

Print ISBN-13: 9780190274320

Published to Oxford Scholarship Online: May 2017

DOI: 10.1093/acprof:oso/9780190274320.001.0001

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Macroeconomic equilibrium model building and the stability problem

Macroeconomic equilibrium model building and the stability problem

(p.117) Chapter 9 Macroeconomic equilibrium model building and the stability problem
Equilibrium Models in Economics

Lawrence A. Boland

Oxford University Press

This chapter will consider all major ways of avoiding the methodological questions facing the construction of any equilibrium model that attempts to address the need to explain an equilibrium’s ‘stability’. In this regard, the chapter discusses rational expectations in a microeconomic context followed by a discussion of macroeconomic equilibrium models. Consideration of rational expectations invokes various ideas about learning in macroeconomics. Building macroeconomic models is one of the three basic strategies of avoidance that will be critically examined. A second method involves stochasticism that relies of the use of ‘bounded rationality’, ‘Bayesian learning’, and ‘econometric learning’. The third way of avoiding the methodological questions is to invoke instrumentalism which involves the claim that equilibrium models serve only as instruments for forming policy, and can be judged only on their practical success, not on the logic underlying them.

Keywords:   stochasticism, instrumentalism, Rational Expectations Hypothesis, bounded rationality, Bayesian learning, econometric learning

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