Rational Animals

I like this piece from Martin since it is reasonably parsimonious in the way it uses rational forsight.

The question remains “How rational do agents have to be in order to incorporate the output increases observed in the 1990s into the price of bonds being traded in the 1970s?” Do the agents need to have a demographic model like the one presented in this paper in order to anticipate the change in output? The answer is no. Individual agents simply looks forward to their own path of lifetime labor income. The agents in the model know their life time working hours and realize that their highest output years are yet to come. They realize that in the future their own household output per person will rise (their children becoming adults). Therefore, each agent wishes to borrow against these future increases in wealth. Unfortunately for them, the shock that they face turns out to be aggregate — their cohort goes to the bond market with them and interest rates rise. This is simply the flip side of why interest rates are low now.