Comment of the Day: Robert Waldmann: Undergrad Textbook Macro vs. Really Existing Academic Macro: "I'd also say that the hope that QE would work had quite a lot to do with the really existing macro paradigm...
...Those who thought the expected inflation imp was our best hope were right (by process of elimination given the hopelessly confused fiscal authorities). However, the analysis was (mildly) tainted by the temptation to assume rational expectations. This assumption implies that beliefs about future policy correspond to future policy so a promise to inflate is credited if it is credible, and policy makers are assumed to choose between credible and non-credible policies.
The profession's decision to abandon methodological individualism and instead assume Nash equilibrium, Clairvoyance and ESP (but I repeat myself) influenced otherwise reasonable people.
Of course "help me expected inflation imp. You are my only hope" marginally beats "help me Obi-Wan Kenobi. You are my only hope".
