The Alleged Necessity of Microfoundations
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It is often said that models in the microfoundations literature derive macroeconomic results from the theory of individual behavior only. This paper examines two of the assumptions that are usually made in these models: market clearing and rational expectations. In the context of simple models it is shown that only in some special cases these assumptions can be derived from the fundamental notion that individuals behave rationally. Thus, the usual rationale for the microfoundations literature is challenged. The paper concludes with a more modest rationale for the “necessity” of microfoundations.
- r e h
- money supply