How an Irrational Fad Became Entrenched
How was it that just a few years later it was almost impossible to get anything published without assuming rational expectations, efficient markets, etc.
Let me tell you. For a period of about 5 to 10 years, you could not get hired as a macroeconomist at a major university without a Ph.D disseration that used Euler equations. Everybody was in love with the technique. It didn’t matter whether the young graduate students using the technique had any economic intuition or not. Those of us who didn’t jump onto the fad simply could not get placed out of graduate school. At MIT, Dornbusch and Fischer were the ones with the power to place graduate students in academic jobs, and so those jobs went to their dittoheads. Who then proceeded to submit and referee articles for journals and–guess what?–just about every published article conformed to what Olivier Blanchard aptly called the “haiku” of the technique.
The rational expectations revolution was carried out by scarcely more than a handful of economists dispersed among key graduate departments, whose genes were the only ones that stayed in the pool. In a different world, Clower and Leijonhuvfud would have been ancestors of a significant part of modern macroeconomics. Had that transpired, I believe that the field would be in much better shape now.