Abstract
‘Rational expectations’ is an equilibrium concept that can be applied to dynamic economic models that have elements of ‘self-reference’, that is, models in which the endogenous variables are influenced by the expectations about future values of those variables held by the agents in the model. The concept was introduced and applied by John F. Muth (1960; 1961) in two articles that interpreted econometric distributed lag models. Muth used explicitly stochastic dynamic models and brought to bear his extensive knowledge of classical linear prediction theory to interpret distributed lags in terms of economic parameters. For Muth, an econometric model with rational expectations possesses the defining property that the forecasts made by agents within the model are no worse than the forecasts that can be made by the economist who has the model.
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Sargent, T.J. (2010). Rational expectations. In: Durlauf, S.N., Blume, L.E. (eds) Macroeconometrics and Time Series Analysis. The New Palgrave Economics Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9780230280830_22
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DOI: https://doi.org/10.1057/9780230280830_22
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