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RATIONAL FORMATION OF EXPECTATIONS: KEYNESIAN UNCERTAINTY AND DAVIDSON'S (NON)‐ERGODICITY‐CRITERIUM
Author(s) -
Feltz W.J.,
Hoogduin L.H.
Publication year - 1988
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.1988.tb00871.x
Subject(s) - economics , rational expectations , argument (complex analysis) , irrational number , mathematical economics , ergodicity , keynesian economics , positive economics , econometrics , mathematics , statistics , biochemistry , chemistry , geometry
In this paper Davidson's argument that expectations formation according to the Rational Expectations Hypothesis (REH) may be irrational is evaluated from the viewpoint of Keynes’probability theory. Although Davidson's conclusion is supported, it is contended that his arguments are not derived from and at some points are even incompatible with Keynes’theory of probability. It is further shown why (REH) should be rejected in the light of Keynes’probability theory. Finally, two alternative ways to treat expectations which are consistent with both rational behaviour and Keynes’probability theory are sketched.