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The Efficient Markets Hypothesis as Meta Predictor

Bill Easterly answers Her Majesty’s questions on the role of economists in the financial crisis:

We correctly predicted that we would not be able to predict it.

Robert Lucas spells out the obvious implications:

The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.

posted on 10 August 2009 by skirchner in Economics, Financial Markets

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What if Robert Lucas is wrong and it happens to be that potential bubbles are far easier to identify than is generally thought?  Just by literally recognizing what’s not normal as it’s occurring after properly framing the data [See the charts covering February 1976-September 1981, September 1981-October 1987, and December 1991-April 1997 for greater detail.]  If that works, the September 1981-October 1987 period provides a good illustration of how a bubble might be made to pop after it’s formed.

Posted by Ironman  on  08/11  at  05:10 AM


The EMH does depend on any particular stochastic process, nor should we expect asset prices to have deterministic relationships with known or observable fundamentals.

Posted by skirchner  on  08/11  at  10:57 PM



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