Microfoundations of Macroeconomic Fluctuations and the Laws of Probability Theory: the principle of large numbers versus rational expectations arbitrage （2002）
Abstract：The principle of large numbers shows that the relative deviation for a macro system with independent elements is of the order of Lucas’ approach to a microfoundations for macroeconomic fluctuations is thus not capable of explaining the magnitude of observed macroeconomic fluctuations. Arbitrage activity would largely eliminate correlations created by rational expectations among economic agents when they face counter movements in relative prices. The complex nature of many-body problems and the statistical feature of aggregate indexes cannot be ignored in a micro–macro modeling. Intermediate structures, such as fifinancial markets and industrial organizations, are more important than households and fifirms in generating business cycles.
Keywords: Large numbers; Microfoundations; Arbitrage; Relative price movements; Rational expectations;Intermediate structure
Ping Chen, “Microfoundations of Macroeconomic Fluctuations and the Laws of Probability Theory：the principle of large numbers versus rational expectations arbitrage,” Journal of Economic Behavior & Organization, 49, 327-344 (2002). Also, in Chen (2010), Chapter 13, pp. 251-269.
