Symposium: on the role of market belief in economic dynamics, an introduction

Abstract

Papers in this symposium were presented at a Stanford University conference on August 10–14, 2009 entitled “When Are Diverse Beliefs Central?” They reflect the rapidly growing literature on the impact of diverse beliefs. It may thus be helpful to the reader if I use this introduction to highlight some ideas of this literature as reflected in the papers of this volume. As the era of Rational Expectations (in short RE) comes to a close it is important to clarify two points. First, the success of RE in disciplining macroeconomic modeling should not obscure the fact that the term “rational” is merely a label. Rationality of actions and rationality of beliefs have little to do with each other and using the term “rational” in RE has tended to brand other beliefs as “irrational.” Studying axioms of belief rationality is actually a fruitful area of research that can fill the wide open space between RE and true irrational beliefs. A second point relates to private information. Not wishing to contradict RE, many adopted the device of asymmetric private information as the “cause” of diverse beliefs. Indeed, some view diverse beliefs as equivalent to asymmetric information. This is theoretically and empirically the wrong solution and in Kurz (2008, 2009) I explain why. It suffices to say that in large markets behavior under private information is different from behavior under diverse beliefs with common information. Also, all empirical evidence associates diverse forecasts with diverse modeling or diverse interpretation of public information. Finally, due to stochastic independence of private information over agents and time, RE models with asymmetric private information fail to deliver the key dynamic properties that are the central implications of