Rational Expectations in Economic Theory

Vîntu, Denis (2025): Rational Expectations in Economic Theory.

Abstract

This paper examines the rational expectations hypothesis, a central concept in modern macroeconomics. It explores the theoretical foundations, methodological implications, applications in macroeconomic models, empirical evidence, criticisms, and relevance for contemporary policy analysis. The analysis highlights both the strengths and limitations of rational expectations, situating it as a benchmark assumption that continues to shape modern economic thought.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational Expectations; New Classical School; Dynamic Stochastic General Equilibrium (DSGE); Inflation Targeting; Macroeconomic Policy; Monetary Policy Credibility; Forward-Looking Behavior; New Keynesian Phillips Curve; Microfoundations; Policy Ineffectiveness Proposition; Expectations Formation; Central Bank Policy; Price Stability; Policy Rules vs. Discretion; Economic Forecasting
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Muth, J. F. (1961). Rational Expectations and the Theory of Price Movements. \textit{Econometrica}, 29(3), 315--335.

Lucas, R. E. (1972). Expectations and the Neutrality of Money. \textit{Journal of Economic Theory}, 4(2), 103--124.

Lucas, R. E. (1976). Econometric Policy Evaluation: A Critique. In K. Brunner \& A. H. Meltzer (Eds.), \textit{The Phillips Curve and Labor Markets}. Carnegie-Rochester Conference Series on Public Policy, 19--46.

Sargent, T. J., \& Wallace, N. (1975). “Rational” Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule. \textit{Journal of Political Economy}, 83(2), 241--254.

Sargent, T. J. (1987). \textit{Dynamic Macroeconomic Theory}. Harvard University Press.

Lucas, R. E. (1981). \textit{Studies in Business-Cycle Theory}. MIT Press.

Blanchard, O. J., \& Fischer, S. (1989). \textit{Lectures on Macroeconomics}. MIT Press.

Evans, G. W., \& Honkapohja, S. (2001). \textit{Learning and Expectations in Macroeconomics}. Princeton University Press.

Snowdon, B., \& Vane, H. R. (2005). \textit{Modern Macroeconomics: Its Origins, Development and Current State}. Edward Elgar.

Akerlof, G. A., \& Shiller, R. J. (2009). \textit{Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism}. Princeton University Press.