Information, expectations and macroeconomic policy.

Abstract

The thesis is motivated by some important recent developments in macroeconomic theory and the theory of macroeconomic policy. A common theme emphasized throughout is the integration of rational expectations into macroeconomic policy evaluation and the sophism of conducting evaluations predicated on alternative expectations hypotheses. The application of rational expectations to optimal control theory inspires a game-theoretic paragigm for the derivation of optimal economic policies. This transform fundamentally the way in which economists should address the control problem. The recent proliferation of research in the area is subject to the first systematic investigation. The necessity for assimilating model uncertainty into the problem of policy evaluation is emphasized. This is made operational with respect to a particulaxly topical issue concerning the optimal choice of monetary instrument. A substantial part of the thesis is devoted to a rigorous exploration of the information structure conditioning expectations. Particular emphasis is on partial ignorance. An intelligent system can exploit statistical filtering techniques to extract the information content of certain economic variables. The thesis illustrates vividly the potentially critical dependence of the laws of motion of the system on the information structure. it calls for a detailed explication of that structure a3 a pre-requisite for any analysis and highlights properties of certain earlier treatments which are symptomatic of their neglect of this. Analytical work is combined with computer simulations of a larger econometric model. Higher order dynamics are the realised 3 consequences of asset accumulati6n and the government budget constraint. The issue of bond-financed deficit instability is subject to extensive testing and the implications of divergent e: cpectations mechanisms elicited.