Economists and scholars in related fields discuss the concept of rationality of expectations from both a theoretical and an empirical point of view, and at both individual and collective levels. Concerning the first aspect, the book focuses on how agents collect and process information and how market opinion is formed. Concerning the second aspect, it presents studies based on individual price expectations and on the consensus revealed by survey data. Contributors analyze price expectations in a variety of markets, periods, and countries, paying special attention to financial markets which have represented the main field of study over the last ten years. Annotation copyrighted by Book News Inc., Portland, OR

Why are financial prices so much more crisis-prone and unstable than real economy prices? Because they are doing different things. Unlike real economy prices, rooted in the real goods and services produced and exchanged, financial prices attempt to value future income flows from financial and capital assets. These valuations fluctuate erratically because expectations of the future fluctuate – and large liquid financial markets can amplify, rather than correct, these effects. The book builds on the insights of economists Frank Knight and John Maynard Keynes, that uncertainty of the future is essential to understand the processes of economic production and capital investment, and adds to this Karl Popper's general explanation of how expectations of an uncertain future are formed and tested through a trial and error process. Rather than relying on fluctuating financial prices to provide a guide to an uncertain future, it suggests a better approach would be to adopt the methods common to other branches of science, and create testable (falsifiable) theories allowing reasonable predictions to be made. In finance, the elements of one such theory could be based on the concept of forecasting yield from capital assets, which is a measurable phenomenon tending towards aggregate and long-term stability, and where there is a plentiful supply of historic data. By methods like this, financial economics could become a branch of science like any other. To buttress this approach, the widely accepted public policy objective of promoting real economy price stability could be widened to include financial price stability.

Drawing on theory and empirical research, this interdisciplinary book brings together leading social scientists to examine how prices are set and how values emerge inside and outside of markets, which have become the central force in the contemporary economy.

Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.

This thesis is a collection of three empirical papers that tests hypotheses within the context of two related and intersecting theoretical frameworks: rational expectations and efficient markets. The aim is to empirically explore to what extent households form their inflation expectations in a rational manner, and to explain why households' perceptions may deviate from the measured official rate. This is done by studying how their expectations change with economic conditions and with information about their readiness to spend money on cars and houses. The thesis also addresses the effects of option introduction on the prices and risk of the underlying securities, where this information implicitly tests stock market efficiency.??Chapter 1 provides an overview of different concepts of expectations and describes the link between the hypotheses of rational expectations and efficient markets. The chapter also presents some stylised facts about the main dataset used to explore households' opinions about past and future inflation rates, and it provides a summary of each following chapter.??Chapter 2 explores to what extent households' inflation expectations are consistent with theories of rationality, and how these expectations change in times of major economic events and changes in the inflation environment. The events studied are the financial and economic crisis of 2008, several euro-cash changeovers, and periods of low and high inflation. The results show that households do not form rational expectations in the sense of Muth (1961).??Chapter 3 investigates whether households' purchasing plans for big expenditure items matter to households when they form their views on past and future inflation, and whether differences in their purchasing plans can explain the deviations usually found between surveyed inflation and the official measure of the rate of inflation. The results show that stronger incentives to collect information on inflation induce households to produce perceived and expected inflation rates that more closely correspond to the officially measured rate of inflation.??Chapter 4 investigates the effects of option introduction on the prices and risk of the underlying securities. The results show that the introduction of options provide the underlying stocks with a significant price increase, and a persistent excess return compared to an index indicating normal return. The impact on the total risk is also favourable, while no influence on the systematic risk could be verified. Volatility in the underlying stocks decrease continuously for ten months after the introduction of the option program.