Most mainstream macroeconomic theoretical innovations since the 1970s — Rational expectations

"Unlike in the Solow model, the factors important to the savings decision now enter separately from those important to the investment decision. Aggregate demand pathologies are, nonetheless, impossible, because in Lucas’s model the same agents make both the savings and the investment decision, which insures ex ante coordination, and the agents have rational expectations, which insures that mistakes about the future course of the economy are necessarily unsystematic. Furthermore, the supply of labor responds elastically to temporarily high real wages: workers make hay while the sun shines."

"Its development of Mises’s theory of action anticipated much of the rational expectations idea that would later win Robert Lucas a Nobel Prize."

"The rational expectations revolution of the 1970s threw out the textbook Keynesian apparatus because it did not cope well with the simultaneous appearance of high inflation and high unemployment in the 1970s. But the model could not have been rejected so quickly on empirical grounds if it was not already on weak theoretical foundations."

"So monetary policy decisions tend to regress toward the mean and to be inertial—and hence biased in just the same way that adaptive expectations are biased relative to rational expectations. But errors like that, while systematic, will generally be small and will tend to shrink over time. And, in return, the system builds in natural safeguards against truly horrendous mistakes."

"The current macroeconometrics literature has proposed two ways to confront general equilibrium rational expectations models with data. The first, an estimation approach, is the direct descendant of the econometric methodology proposed 50 years ago by Haavelmo (1944). The second, a calibration approach, finds its justification in the work of Frisch (1933) and is closely linked to the computable general equilibrium literature surveyed e.g. in Shoven and Whalley (1984)."

"The attack on Keynesian economics in the 1960s and 1970s by monetarists and by the theory of rational expectations undermined the intellectual foundations of development economics. The essence of this criticism was that there is only one economics, and that economics is a universal science equally applicable to all societies."