The Fallacy of Micro Foundation and Micro Fluctuations

The Fallacy of Micro Foundation and Micro Fluctuations
Authors/editors: Chen, Ping
Type: working paper
Publisher: IC² Institute
Series: IC² Institute Working Papers; WP-1999-02-01
Date: 1999-02
Full text: http://hdl.handle.net/2152/18579

Description

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.

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