Removing the “plainly heroic” assumption that all actors have perfect foresight can change the results of key economic models, according to Columbia University professor Michael Woodford.

In a recent NBER working paper, Woodford argues that while rational expectations are often assumed to be a “useful idealisation”, their inclusion in dynamic stochastic general equilibrium models can lead to counterintuitive results.

One such result is the “Neo-Fisherian” idea that higher interest rates can