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Change and Expectations in Macroeconomic Models:
Recognizing the Limits to Knowability
Roman Frydman and Michael D. Goldberg
March 13th, 2012
Beyond building on Popper’s insights concerning the possibility, scope, and character of prediction in the social sciences, our IKE model of asset-price swings exemplifies Hayek’s claim that,
“Our capacity to predict will be confined to...general characteristics of the events to be expected and not include the capacity for predicting particular individual events”
(Hayek, 1978, p. 33).
Although an IKE model, by design, stops short of predicting “particular individual events,” such as when an asset-price swing will begin and end, it does generate predictions concerning their “general characteristics” – for example, that they tend to be quite persistent. Thus, by examining alternative models’ implications concerning the persistence and related features of such swings, an economist may compare explanations of economic phenomena.