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Topic: Rational expectations

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Rational expectations - Wikipedia, the free encyclopedia Rational expectations theories were developed in response to perceived flaws in theories based on adaptive expectations. Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Rubert E. Lucas Jr. Rational expectations theory is the basis for the efficient market hypothesis and efficient markets theory. en.wikipedia.org /wiki/Rational_expectations   (1540 words)

Adaptive expectations - Wikipedia, the free encyclopedia Though many macroeconomists saw the theory of rational expectations as a revolutionary improvement during the 1970s and 1980s, criticisms of that theory have encouraged a return to the adaptive expectations model. In economics, adaptive expectations means that people form their expectations about what will happen in the future based on what has happened in the past. The theory of adaptive expectations was popular in the 1980s, as an explanation of some aspects of the economic crisis that the West went through after the 1970s oil shock. en.wikipedia.org /wiki/Adaptive_expectations   (501 words)

Federal Reserve Bank of Minneapolis-Annual Report-Rational Expectations: Fresh Ideas that Challenge Some Established Views of Policy Making 1976-77 (1977) Rational expectations was quickly seen by Sargent and Wallace to be of great importance to the research program being carried on at the Federal Reserve Bank of Minneapolis, particularly as they began to flesh out the policy implications of Lucas' model. Since rational expectations ideas have developed as criticism of some prevailing ways of viewing the economy and the role of policy, the case for rational expectations is, to a large extent, the case against these current views. The strict form of rational expectations model used by Sargent merely survives as one legitimate candidate in a contest that may never be fully decided from the historical data. woodrow.mpls.frb.fed.us /pubs/ar/ar1977.cfm?js=0   (8831 words)

Melberg, Hans O. (1997), Why (dis)believe rational expectations? Although there are some situations in which it is impossible to form rational expectations, this does not mean that it is impossible to form a coarse estimate in many situations about the value and cost of information. However, a reading of his book shows that Sheffrin is using a survey of the literature generated by rational expectations as a veichle to discuss the truth and relevance of rational expectations. Rational expectation, on this approach, becomes nothing more than the application of the maximizing assumption in the field of information: You collect information as long as the marginal benefits are higher than the marginal costs. www.geocities.com /hmelberg/papers/970307.htm   (3750 words)

Rational Expectations, by Thomas J. Sargent: The Concise Encyclopedia of Economics: Library of Economics and Liberty Rational expectations is a building block for the "random walk" or "efficient markets" theory of securities prices, the theory of the dynamics of hyperinflations, the "permanent income" and "life-cycle" theories of consumption, the theory of "tax smoothing," and the design of economic stabilization policies. Rational expectations has been a working assumption in recent studies that try to explain how monetary and fiscal authorities can retain (or lose) "good reputations" for their conduct of policy. Robert Lucas showed that if expectations are rational, it simply is not possible for the government to manipulate those forecast errors in a predictable and reliable way for the very reason that the errors made by a rational forecaster are inherently unpredictable. www.econlib.org /library/Enc/RationalExpectations.html   (2454 words)

The Lucas/Friedman Rational Expectations Model Rational expectations destroyed the notion of a medium run trade-off between higher inflation and lower unemployment. The appeal of rational expectations is that it assumes that agents are smart enough to understand the macroeconomic model that explains the economy. The difference between the rational expectation of this variable and its actual value is the mean-zero error term. darkwing.uoregon.edu /~pshea/Teaching/Econ_313/Lecture_Notes/Rational_Expectations.html   (2210 words)

expect.html Rational expectations and expected utility have become vital empirical and theoretical research tools in neoclassical economics (though there are criticisms from within neoclassicism). The theory (rational expectations; see Lucas and Sargent 1981 or Muth 1961) intentionally makes no attempt to explain how expectations are formed, but contends that whatever the process, rationality combined with the discipline of the market must (after a period of learning) lead to a situation in which any persistent forecasting errors are eliminated. Post Keynesian economists have been highly critical of the so-called "rational expectations revolution." Because they draw their inspiration from KEYNES, Post Keynesians have tended to focus on factors consistent with their belief that market systems are inherently unstable and prone to collapse. geowww.geo.tcu.edu /econ/harvey/5133/expect.html   (1487 words)

ratexp.txt The core of the rational expectations hypothesis is that peoples's expectations, and thus behavior, depend on their understanding of the economy, including the goals and actions of policy makers. Rational expectations direct attention to policy functions, policy makers abilities to commit to these functions, and peoples expectations relating to these features of the environment. Given rational expectations, they know the central bank's policy function but do not observe the current money supply and its unsystematic random component. www.chass.utoronto.ca /~floyd/newsletter/ratexp.txt   (1601 words)

Federal Reserve Bank of Minneapolis-The Region-Interview with Thomas J. Sargent (December 1989) Sargent once likened the rational expectations theory to the strategy pursued by the Minnesota Vikings; that is, a game plan is designed to counter the predicted strategies of the opposing team. Another thing that rational expectations says is that you should consider the behavior of both private agents and government. One of the criticisms that's been made of rational expectations is attributing way too much knowledge and information to people, and the point of this work is for us to learn how people learn. minneapolisfed.org /pubs/region/89-12/int8912.cfm   (2271 words)

rationality.html One of the main criticisms of the rational expectations hypothesis is that, as Arrow (1978) outlines, Economic agents are required to be superior statisticians, capable of analysing the future general equilibria of the economy. Expectations often form a major part of the decisions which are made in the economy and as such they should also come under the doctrine of rationality. The advent of rational expectations in econometric models has marked a revolution in economic thinking that is comparable in the magnitude of its impact on the economics profession to the Keynesian revolution of a half century ago. www.maths.tcd.ie /pub/econrev/ser/html/rationality.html   (2865 words)

ratirnew.doc Material wealth is greatest when the agent has rational expectations (where the budget line crosses the x-axis), but agents with a taste for irrationality are likely to trade off some material wealth in exchange for more satisfying beliefs. According to the theory of rational irrationality, being irrational - in the sense of deviating from rational expectations - is a good like any other; the lower the private cost, the more agents buy. Downs (1957) first introduced the theory of rational ignorance to explain why voters know so little about seemingly important issues: when the expected benefits of information are small relative to the costs (as they almost always will be in an election), people buy little information. www.gmu.edu /departments/economics/bcaplan/ratirnew.doc   (4398 words)

Expectations The idea behind Rational Expectations is that if people can decide "rationally" how to divide their income between saving and consumption, and how to divide their consumption between coffee and donuts and beemers and other products, then people can determine with the same "rationality" what they expect will happen in the economic system. Expectations are said to be "rational" if they make efficient use of all available information, allowing for the cost of the information. The other view, "Rational Expectations," holds that people learn very quickly and, by learning the patterns of economic activity, can often anticipate experience and adapt to changes in economic circumstances as they happen -- rather than after. william-king.www.drexel.edu /top/prin/txt/controv1/RE1.html   (395 words)

ec813a_a.doc Essentially it goes without saying today, not only that expectations (particularly inflation expectations) must be taken into consideration in the structure of any proposed macroeconomic model, but also that such expectations must be modeled as rational expectations. Third, the time horizon over which an expectation is formed will depend on the problem for whose solution it is necessary to form the expectation, and the same person may easily have very different expectations about the course of prices over, for example, the next year and the next decade. First, different individuals and other agents will, in general, form different expectations of the same varaible over the same future horizon; this means that some expectations are bound to prove wrong, which is contrary to the assumptions made in analyzing fully anticipated inflation. www.msu.edu /course/ec/813a/rasche/ec813a_a.doc   (843 words)

The Filter^: Irrational Expectations Rational Expectations, a cornerstone of post 60s economics assumes that people, on average, are correct. Just one of the things about Rational Expectations I struggle with is the impossibility of individuals to have RE if they belong to a group that does. Of course, RE economists usually speak of rationality as belonging or not belonging to a group. thefilter.blogs.com /thefilter/2004/08/irrational_expe.html   (1347 words)

Rational Expectations Rational businessmen would only come to expect these increases -- hence the term, rational expectations -- and would simply build automatic responses to monetary policy in their pricing systems. Rational expectations borrowed heavily from earlier conservative theories, but Lucas supported these arguments mathematically, and in far greater detail and nuance. In fact, rational expectations spawned many new mathematical and statistical techniques, and allowed a generation of economists to specialize in these techniques. www.huppi.com /kangaroo/L-chilucas.htm   (2163 words)

Hussman Funds - Weekly Market Comment : December 1, 2003 - Rational Expectations Very simply, a rational expectations equilibrium is a “fixed point” where f(X) = X. That is, the beliefs of individuals and investors produce actual economic data that is consistent with those beliefs. In a one-shot world, a rational expectations equilibrium might be called a “self fulfilling prophesy.” But the concept is much richer than this. To appreciate how market action conveys information, it's helpful to understand the concept of a “rational expectations equilibrium.” The legendary hedge fund manager George Soros coined his own term “reflexivity” to describe essentially the same idea. www.hussmanfunds.com /wmc/wmc031201.htm   (1682 words)

Assessing Rational Expectations 2 - The MIT Press In this book, Roger Guesnerie continues the critical analysis of the REH begun in his Assessing Rational Expectations: Sunspot Multiplicity and Economic Fluctuations, which dealt with the questions raised by multiplicity and its implications for a theory of endogenous fluctuations. The rational expectations hypothesis (REH) dominates economic modeling in areas ranging from monetary theory, macroeconomics, and general equilibrium to finance. A broad "eductive" stability test is proposed that includes common knowledge and results in a unique "rationalizable expectations equilibrium." This test provides the basis for Guesnerie's theoretical assessment of the plausibility of the REH's expectational coordination, emphasizing, for different categories of economic models, conditions for the REH's success or failure. mitpress.mit.edu /catalog/item/?ttype=2&tid=10520   (351 words)

Rational Expectations - Cambridge University Press The author argues that while rational expectations are still central to macroeconomic policy debates, fully workable models have not yet been devised, and offers reasons for the lack of practical and conceptual progress. $29.99 (C) Economists have developed models in which individuals form expectations of key variables in a "rational" manner such that these expectations are consistent with actual economic environments. In this revised and expanded second edition, Professor Sheffrin first explores the logical foundation of the concept and the case for employing it in economic analysis. www.cambridge.org /us/catalogue/catalogue.asp?isbn=0521479398   (135 words)

CEF 1997: Adaptive Rational Expectations in Models of Monetary Dynamics This behavior is inherited by a wide range of models employing the perfect foresight or rational expectation assumption. As the error in expectations grow (and the system becomes more unstable) greater weight is placed on the costly (stabilizing) predictor. According to this scheme we take expectations as a weighted sum of two predictors. bucky.stanford.edu /cef97/abstracts/chiarella2.html   (365 words)

Amazon.com: The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements: Books: Esther-Mirjam Sent,Craufurd D. Goodwin In the course of exploring the multiple dimensions of rational expectations analysis, she focuses on the work of Thomas Sargent, an instrumental pioneer in the development of this school of thought. Rational Expectations and Econometric Practice by Robert E. Lucas Jr. The treatment aims to illuminate some of the shifting negotiations and alliances that characterize the rise and shift of direction in rational expectations economics. www.amazon.com /exec/obidos/tg/detail/-/0521571642?v=glance   (773 words)

Rational Expectations Beginning in 1972 with work by Robert Lucas, macroeconomics moved toward a different way of modeling expectations, using the concept of rational expectations (RE). When there is a change in the economic environment, the theory of adaptive expectations implies that people will make systematic and predictable mistakes. The Keynesian model of, say, 1965, didn't pay too much attention to expectations: they were assumed to be static and exogenous. www.fiu.edu /~thompsop/money/expectations/expectations.html   (392 words)

Expectation Formation of Older Married Couples and the Rational Expectations Hypothesis "Expected versus realized income changes : a test of the rational expectations hypothesis," Discussion Paper 105, Tilburg University, Center for Economic Research. We find that regardless of whether we assume that married individuals form their own expectations taking spouse’s information as exogenous, or the reports of the couple are the result of a joint expectation formation process, their expectations are consistent with the RE hypothesis. In prior research we found that individual retirement expectation formation was consistent with the Rational Expectation hypothesis, but in that work spousal considerations were not analyzed. ideas.repec.org /p/mrr/papers/wp062.html   (700 words)

Guardian Unlimited Guardian daily comment Joseph Stiglitz: There is no invisible hand Let me be clear: the rational expectations models made an important contribution to economics; the rigour which its supporters imposed on economic thinking helped expose the weaknesses underlying many hypotheses. John Maynard Keynes long ago described the stock market as based not on rational individuals struggling to uncover market fundamentals, but as a beauty contest in which the winner is the one who guesses best what the judges will say. His research shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically, and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilised by orthodox economists. www.guardian.co.uk /comment/story/0,3604,863426,00.html   (862 words)

CEPR Discussion Paper Abstracts They either form rational expectations and internalize the uncertainty about the Central Bank’s preferences in full; or alternatively, and if this process of internalization is costly, it forms a ‘best’ guess regarding those preferences. Under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full rational expectations solution. In this paper we examine the effects of private agents being less than fully rational. www.cepr.org /pubs/new-dps/dplist.asp?dpno=5042   (279 words)

Thomas J. Sargent "Rational Expectations and the Theory of Economic Policy", with N. Wallace, 1976, JME. "Rational Expectations and the Dynamics of Hyperinflation", with N. Wallace, 1973, IER "Rational Expectations, Econometric Exogeneity and Consumption", 1978, JPE cepa.newschool.edu /het/profiles/sargent.htm   (526 words)

Fischer, Stanley: Rational Expectations and Economic Policy This book brings us up to date on an extremely lively discussion involving the role of expectations, and more particularly rational expectations, in the conduct of stabilization policy. This is the first serious book to examine the rational expectations thesis in any depth, and it will prove invaluable to anyone involved with macroeconomic policy generally and with monetary economics in particular."—G. Shaw, The Economic Journal Unusually for a conference proceedings the book is well indexed and it is also replete with numerous and up-to-date references. www.press.uchicago.edu /cgi-bin/hfs.cgi/00/682.ctl   (308 words)

SSRN-Justifying Rational Expectations by Stephen Morris Morris, Stephen Edward, "Justifying Rational Expectations" (March 1995). With asymmetric information, the solution concept of competitive equilibrium has been generalized to rational expectations equilibrium. In a static economy with symmetric information, the informational requirements for competitive equilibrium are very weak: markets clear and each agent is rational. papers.ssrn.com /sol3/papers.cfm?abstract_id=294819   (164 words)

SSRN-Legal Transitions, Rational Expectations, and Legal Progress by Kyle Logue In both of these admittedly unrelated cases, there is a strong case to be made that the relevant parties - manufacturers in one and sophisticated taxpayers in the other - can rationally predict the future course of law and its application to them. One way of putting my conclusion is that, if retroactivity is ever going to make sense on incentive grounds, it will make sense in these cases. To the extent, however, that these assumptions do not apply, the case for retroactivity becomes considerably weaker, at least on incentive- or anticipation-grounds. papers.ssrn.com /sol3/papers.cfm?abstract_id=414364   (320 words)

UNDERSTANDING RATIONAL EXPECTATIONS. Includes review of econometrics and the role of expectations in economic theory, treatment of expectations in Keynesian econometrics, treatment under rational expectations models, why this amounts to a counter revolution against Keynesian economics, and policy implications should the model be proved correct. An attempt to explain the econometric theory of rational expectations without mathematics. PAGE LENGTHS, FOOTNOTES AND BIBLIOGRAPHIC REFERENCES: The title of the paper, usually typed in capital letters, is followed by a brief description of the paper and a specification of text page length (NOT including the bibliography or endnote pages), number of footnotes or citations, and number of bibliographic references. www.academictermpapers.com /abstracts/7000/07336.html   (166 words)

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