Rational expectations Quotes

“Muth is the Rosseau of the rational expectations revolution; Lucas is its Robespierre.”

“Wikipedia: Rational expectations”

“Its development of Mises’s theory of action anticipated much of the rational expectations idea that would later win Robert Lucas a Nobel Prize.”

“Under perfect foresight (rational expectations), a regime of sequential loan markets and spot markets in labor services also supports the optimal solution as a competitive equilibrium.”

“Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex-post returns.”

“The whole of academic macroeconomics is touched by the rational expectations hypothesis. Althought it has been criticized on conceptual grounds and as emprically inadequate, the rational expectations hypothesis sets a noncontroversial standard for modeling expectations in macroeconomics.”

“The stampede toward “rational expectations”—widely thought to be a “revolution,” though it was only a generalization of the neoclassical idea of equilibrium—derailed the expectations-driven model building that had just left the station. In the end, this way of modeling has not illuminated how the world economy works.”

“The attack on Keynesian economics in the 1960s and 1970s by monetarists and by the theory of rational expectations undermined the intellectual foundations of development economics. The essence of this criticism was that there is only one economics, and that economics is a universal science equally applicable to all societies.”

“The rational expectations revolution of the 1970s threw out the textbook Keynesian apparatus because it did not cope well with the simultaneous appearance of high inflation and high unemployment in the 1970s. But the model could not have been rejected so quickly on empirical grounds if it was not already on weak theoretical foundations.”

“The reason is that the second order properties induced by similar general equilibrium models are, in general, so different from those of actual data that some authors (e.g. Campbell and Shiller 1987, Frankel and Froot 1987) have concluded that the simple version of the rational expectations-efficient market hypothesis is severely flawed.”

“So monetary policy decisions tend to regress toward the mean and to be inertial—and hence biased in just the same way that adaptive expectations are biased relative to rational expectations. But errors like that, while systematic, will generally be small and will tend to shrink over time. And, in return, the system builds in natural safeguards against truly horrendous mistakes.”

“Friedman’s monetarist model is distinguished from Lucas’s new classical monetary model in that Friedman imagines that people can be systematically mistaken about the true state of real wages for relatively long periods, while Lucas argues that people have rational expectations (i.e., they make only unsystematic mistakes) and, therefore, correct their judgments about the real wage quickly.”

“The hypothesis was more or less buried during the '60s. Arrow used it in his paper on learning-by-doing in the '60s. Prescott and I used it in that paper of ours on investment. People were aware of it, I didn't understand then how fundamental a difference it mad econometrically. I didn't realize that if you took it seriously you had to rethink the whole question of testing and estimation. I guess no one else did either, except for Muth.”

“One troublesome aspect is the place of rational expectations macroeconomics in the often political debate over Keynesian economics. At least implicitly, many people feel that what's bad for the rational expectations viewpoint is good for the Keynesian one, and vice versa. But it is hard to see how the problems in using the rational expectations approach to explain monetary nonneutrality can alleviate the theoretical and empirical shortcomings of the Keynesian model.”

“Neither historical experiences nor rational expectations models provide much guidance as to how market participants’ expectations will respond in any particular situation. Each situation has its own distinctive characteristics, and there is ample evidence that many market participants’ expectations do not conform to the strictures of the rational expectations hypothesis, whatever they might imply in these situations, each of which appear to be sui generis.”

“In models of the use of information by rational agents, it is generally assumed that all will interpret the same signals in the same way. In the extreme case of the ‘rational expectations hypothesis’, it is held that through mere data-gathering, agents will become aware of the basic, underlying structure and mechanisms of the economy. This hypothesis likewise neglects the conceptual framing involved in the perception of data and the theory-bound character of all observation.”

“The current macroeconometrics literature has proposed two ways to confront general equilibrium rational expectations models with data. The first, an estimation approach, is the direct descendant of the econometric methodology proposed 50 years ago by Haavelmo (1944). The second, a calibration approach, finds its justification in the work of Frisch (1933) and is closely linked to the computable general equilibrium literature surveyed e.g. in Shoven and Whalley (1984).”

“In the late 1970s Lucas and his disciples worked feverishly, attempting to produce theoretical models in which firms and households can observe stock prices and interest rates, yet still be subject of the kind of rational confusion needed to create booms and slumps. They failed. The theory underlying a rational expectations business cycle just didn't work out.
At the same time, it was becoming increasingly obvious that the rational expectation story didn't work in practice either. Here the difficulty is easier to explain: economic slumps last too long.”

“Households’ decisions are more complicated: given their initial capital stock, agents determine how much labor to supply and how much consumption and investment to purchase. These choices are made in order to maximize the expected value of lifetime utility. Households must forecast the future path of wages and the rental rate of capital. It is assumed that these forecasts are made rationally. A rational expectations equilibrium consists of sequences for consumption, capital, labor, output, wages, and the rental rate of capital such that factor and output markets clear.”

“Unlike in the Solow model, the factors important to the savings decision now enter separately from those important to the investment decision. Aggregate demand pathologies are, nonetheless, impossible, because in Lucas’s model the same agents make both the savings and the investment decision, which insures ex ante coordination, and the agents have rational expectations, which insures that mistakes about the future course of the economy are necessarily unsystematic. Furthermore, the supply of labor responds elastically to temporarily high real wages: workers make hay while the sun shines.”