Introduction

Abstract

The past two decades have witnessed major changes in macroeconomic theory and practice. In work pioneered by Lucas, Sargent, Prescott and others, the notion of rational expectations has attained primary focus and is currently regarded as the central building block for almost any macroeconomic model. Particularly due to the resounding impact of Lucas’ seminal contributions, significant attention has been given to solid microfoundations. It is now standard to formulate macroeconomic models by virtue of utility maximizing (representative) households and profit maximizing firms. To formulate macroeconomic activities in a general equilibrium setting has become almost commonplace. Real Business Cycle theory, for example, is a transformation of the domain associated with standard Arrow-Debreu economies into a “fully articulated, artificial” dynamic environment [Lucas, 1980, 696].