The Fallacy of Micro Foundation and Micro Fluctuations

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The Fallacy of Micro Foundation and Micro Fluctuations

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Title: The Fallacy of Micro Foundation and Micro Fluctuations
Author: Chen, Ping
Abstract: Argues that there is no micro foundation for microeconomic fluctuations, or business cycles, based on the law of large numbers in probability theory and statistical mechanics. Discusses the Lucas model of rational expectations as inconsistent with the efficient market hypotheses because arbitrage activities in financial markets can eliminate the intertemporal substitution effect to the macro economy. Suggests the need for nonlinear macroeconomic dynamics and a non-equilibrium mechanism to understand large and persistent business cycles.
Department: IC2 Institute
Subject: macroeconomics microeconomics Lucas model business cycles law of large numbers
URI: http://hdl.handle.net/2152/18579
Date: 1999-02

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