Gooden, a writer and novelist, collects rules and principles related to politics, economics, the arts, sciences, physical survival, the internet, life and work, and laws of the land, such as the domino effect, Warren Buffett's rules, Rational Expectations Theory
, hemline theory, the Bechdel test, rules of journalism, rules of grammar and usage, writers' rules, the laws of sci-fi writers, planetary naming rules, the laws of thermodynamics, the Van Halen Principle, Murphy's Law, Jim Crow laws, three strikes law, and the Miranda rule.
The extreme form is found in rational expectations theory
, which argues government stimulus is almost always unnecessary or damaging.
The section also provides a framework--the expectations theory
of the term structure of interest rates, along with the efficient markets hypothesis--for measuring changes in private-sector perceptions of policy objectives.
Rational expectations theory
developed at a tune when the United States was grappling with high inflation.
The rational expectations critique against Austrian business cycle theory only really works if all--or at least an overwhelming majority of--entrepreneurs are "rational" in the very strict sense implied by rational expectations theory
. Introducing a reasonable handful of less "rational" entrepreneurs into the mix allows for the conclusions of Austrian business cycle theory to take hold--the "average entrepreneur" is of lower quality in the credit-expansion-driven boom than in normal times.
This principle extends even to the sphere of macroeconomics regarding topics such as the efficient market hypothesis and rational expectations theory
The rational expectations theory
requires ordinary people to know about, understand, and care about Bank of Japan policy.
The assertion seemed at odds with everything Bill taught us in graduate school at Brown--that, according to rational expectations theory
, more information should be better than less.
Thus, Cardinal Cajetan, a sixteenth-century prince of the Church, can be considered the founder of expectations theory
If the simple expectations theory
of the term structure holds, then the no arbitrage condition is
These complementary decompositions relate real or nominal long-term interest rates to expected future short-term interest rates (the expectations theory
of the term structure), and relate short- or long-term nominal interest rates to the ex ante real interest rate and the expected inflation rate (the Fisher equation).
According to the expectations theory
of the yield curve, long term interest rates equal a weighted average of short-term rates, with perhaps some small adjustments for liquidity and term premia.