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Imperfect Knowledge Economics: Exchange Rates and Risk Hardcover – September 2, 2007

3.5 out of 5 stars 2 customer reviews

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Editorial Reviews


"[T]he challenge that existing economic orthodoxy may find most disconcerting is Imperfect Knowledge Economics (IKE), the name of a path-breaking recent book."--Anatole Kaletsky, The Times (London)

". . . sets out an alternative approach to prediction, in which the forecaster recognizes that his model will inevitably be less than perfect."--The Economist

"A new book ... coins the phrase "imperfect knowledge economics" to describe this world of fundamental uncertainty."--Finanical Times

"A new conceptual framework--Imperfect Knowledge Economics (IKE)--provides the rationale for policy intervention in asset markets, and also has important implications for how regulators should measure and manage systemic financial risk."--Edmund Phelps, Guardian.co.uk

From the Back Cover

"This marvelous book by Frydman and Goldberg documents . . . invaluable insights of the 'early modern' theory of capitalism that were lost when the profession endorsed rational expectations equilibrium. . . . Happily for me and, I believe, for the profession of economics, this deeply original and important book gives signs of bringing us back on track--on a road toward an economics possessing a genuine microfoundation and at the same time a capacity to illuminate some of the many aspects of the modern economy that the rational expectations approach cannot by its nature explain."--from the foreword by Edmund S. Phelps, winner of the 2006 Nobel Prize in economics

"Anyone who has ever studied markets for financial assets such as currencies knows that it is very difficult to explain, much less predict, short to medium term fluctuations. In their innovative new work, Imperfect Knowledge Economics, Roman Frydman and Michael Goldberg make a strong case that it would be particularly helpful to improve our understanding of how financial markets process new knowledge and information. In addition, the book offers a useful guide to understanding existing empirical exchange rate models."--Kenneth Rogoff, Harvard University

"The centrality of expectations in understanding economic fluctuations has long been recognized, but their formation has not been adequately described. The rational expectation hypothesis was a bold and ingenious attempt, but it has proved empirically very far from satisfactory, most strikingly, in the field of foreign exchange markets, where the good documentation makes the failure easier to establish. Frydman and Goldberg open new doors by a more realistic understanding of the process of forming expectations; by recognizing that universal rules are intrinsically impossible, they exhibit a more creative understanding of the recent history of foreign exchange spot and futures markets."--Kenneth J. Arrow, Nobel Prize-winning economist

"If you are looking for a way to escape from the Procrustean bed of rational expectations equilibrium--and, if you pay attention to real-world data, you should be--try reading this imaginative and intelligent book. It will amply repay your efforts."--Alan S. Blinder, Princeton University

"If you have been puzzled by the difficulty of reconciling uncertainty with the equilibrium models that economists use to explain market outcomes, this is the right book to read and reread. It launches a new approach, Imperfect Knowledge Economics, which highlights the long-recognized failure of prespecified general equilibrium modeling to account for the behavior of agents under changing conditions. Frydman and Goldberg are thus proposing models that are able to generate robust qualitative predictions, leading to a better understanding of short- and long-term swings in economic variables. In macroeconomics, there will undoubtedly be a 'before' and 'after' this book."--Jean-Paul Fitoussi, president, l'Observatoire français des conjonctures économiques, Paris

"The record of contemporary economics in explaining the behavior of exchange rates is a sorry one. Frydman and Goldberg make the foreign exchange rate problem the particular object of a searching critique of current macroeconomics and use it also as the vehicle for demonstrating how they would break its methodological 'stranglehold.' Their own alternative, imperfect knowledge economics, is systematically worked out and persuasively argued. It is my hope that the book will be widely read and debated."--Axel Leijonhufvud, UCLA and the University of Trento

"This is a major and controversial contribution to macroeconomics that cannot fail to make an impact in several areas. Academics will read it for the comprehensive critique of much macroeconomic theory. More empirically motivated economists will look carefully at the rich scope for empirical analysis that the book opens up. Policymakers too will want to look at it--and will be relieved to see that they come off much better than the main authors of the rational expectations school."--Niels Thygesen, University of Copenhagen


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Product Details

  • Hardcover: 368 pages
  • Publisher: Princeton University Press (September 2, 2007)
  • Language: English
  • ISBN-10: 0691121605
  • ISBN-13: 978-0691121604
  • Product Dimensions: 6.3 x 1.1 x 9.4 inches
  • Shipping Weight: 1.5 pounds (View shipping rates and policies)
  • Average Customer Review: 3.5 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Best Sellers Rank: #557,902 in Books (See Top 100 in Books)

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Format: Hardcover
While this book requires a modest mathematical background, it is critical to understanding how markets work and how academic economists have resisted critical changes to their fallen field. This book will prove to be a classic once advocates of Rational Expectations are swept away. For those of you who have seen "The Inside Job" (a wonderful film), you might enjoy reading about the most critical alternative to the Rational Expectations Hypothesis. Mark my words: Professor Roman Frydman will have the last laugh.
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Format: Hardcover
"Imperfect Knowledge Economics" has as its central tenet that most modern economic models are flawed because they are based on the idea that people always act "rationally" (i.e. we always have perfect information, we never suffer from external constraints, and our goals are always to maximize economic value). The book then proposes a new way to think about economics, suggesting that because people act as people the best that economists can do is to make vague general predictions about the future.

Of course, to any non-economist who pays any attention to economic forecasts, all of this is met with a resounding "DUH". The one nice thing about this book is that it hopefully will be read by other economists, and get them to finally realize what most of us have already understood for quite a while, that economists are often the last ones to actually understand what *people* will be thinking, feeling and doing - and of course *people* are ultimately the driving force behind economic markets. (For example: witness how long it took for economists to start saying the word "recession" during this spring of 2008. It turns out that spending data show that consumers knew that poor economic times were coming all the back in the late fall of 2007. Somehow the economists were the last ones to figure this out.)
Probably interesting if you are an economist, or you need to deal with economists on a regular basis (certainly if you need to *argue* with an economist). However other than that, its not going to be all that useful for the rest of us as we already know, understand, and have seen the authors' main points for quite a long time.
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