Rational Expectations Theory


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Rational Expectations Theory

In economics, a theory stating that economic actors make decisions based on their expectations for the future, which are based on their observations and past experiences. A basic example of rational expectations theory is a situation in which a consumer delays buying a certain good because, based on his/her observations and experiences, he/she believes that the price will be less expensive in a month. If enough consumers believe that, demand eases and the good is likely to actually be less expensive next month. Thus, the consumer waits a month before buying the good. Rational expectations theory states that current expectations strongly influence future performance. Economists disagree about how well the rational expectations theory works in the real world.
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Rational expectations theory developed at a tune when the United States was grappling with high inflation.
The rational expectations critique against Austrian business cycle theory only really works if all--or at least an overwhelming majority of--entrepreneurs are "rational" in the very strict sense implied by rational expectations theory.
This principle extends even to the sphere of macroeconomics regarding topics such as the efficient market hypothesis and rational expectations theory.
The rational expectations theory requires ordinary people to know about, understand, and care about Bank of Japan policy.
The assertion seemed at odds with everything Bill taught us in graduate school at Brown--that, according to rational expectations theory, more information should be better than less.
Each relaxes the traditional rational expectations theory in a certain way.
It is now well known that the application of rational expectations theory to actual cases may, for instance, be unsuitable when there are systematic errors in the observed variables, when loss functions are not quadratic, or when variables are constrained to take only positive values.
Yet, according to rational expectations theory, such deviations supposedly cannot be very predictable, because workers soon learn to forecast any systematic relationships.
Tests and descriptions of the rational expectations theory of the term structure constitute a voluminous literature.
Seizing upon so-called rational expectations theory, they argued that multi-year tax cuts would prompt investors to sink money into markets on the basis of an expectation of lower tax rates in the future.
The argument of rational expectations theory has been that, for demand policies to be effective, in the short run, there must be some element of surprise and in the longer-run, all relevant information is not used.
Rational expectations theory taught us a lot, but it may ultimately be wrong.