Rational expectations


Also found in: Wikipedia.

Rational expectations

The idea that people rationally anticipate the future and respond today to what they see ahead. This concept was pioneered by Nobel Laureate, Robert E. Lucas, Jr.

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.
References in periodicals archive ?
Abstract: We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models, and we develop an algorithm to check these conditions in practice.
Sargent and Wallace (1975) used the idea of rational expectations in an otherwise standard IS-LM macromodel with an expectations-augmented Phillips curve to argue that systematic monetary policy actions do not systematically affect unemployment or output.
However, the first analysis of inflation under the rational expectations hypothesis--known subsequently as the "islands theory"--was not considered quite satisfactory by many economists.
Recently macroeconomists have moved to a new neo-classical synthesis by integrating Keynesian features like imperfect competition and nominal rigidities with dynamic stochastic general equilibrium model of the Real Business Cycle Theory with micro foundations and rational expectations, [see, for instance, McCallum and Nelson (1999)].
I think some people feel that the Brookings Papers missed something in that two prominent developments in macroeconomics over the period of its existence--the rational expectations revolution and the simple general-equilibrium real business cycle model--did not figure prominently in the Panel's discussions.
Proponents of rational expectations argued that the question was irrelevant.
The Solution of Linear Difference Models under Rational Expectations," Econometrica, 48, 5, July 1980, pp.
This was reflected in the rules versus discretion debate in monetary policy, (Kydland and Prescott 1977), in the development of rational expectations econometrics (eg Sargent 1973, Barro 1977, McCallum 1983) and in the construction of models with forward looking agents.
Indeed it could be described as a triumph of rational expectations in which the climate of monetary credibility fuels a self-fulfilling inflation control.
Because Campbell and Cochrane's model retains rational expectations, whereas Cecchetti, Lam, and Mark's model is based on distorted beliefs, the two models' implications for survey forecasts will differ.
Cao, 1999, "The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium", Review of Financial Studies, 12:131-163