Rational Expectations

Although I believe Rational Expectations are a far more efficient alternative to Adaptive Expectations I do believe there exist some flaws that are inherent in its fundamentals. As discussed in class last Wednesday and Friday, Rational Expectations (RE) are formulated and derived from models which in return is then used to create specific forecasts. In other words, the outcome is largely a result of people’s expectations as well as what the model dictates. With this being stated I believe that RE works well under relatively simple means of economic theory but are challenged and flawed when it is approached by complicated models that are routinely disputed upon by various schools of thought.  If an expectation is derived from a model that is not consistently accurate or flat out wrong then the expectation itself is then flawed. This does not mean it shouldn’t be used but in economics but it does pose the question of  their reliability and also contests regular forecasting procedures.

Here is a quick read on what Rational Expectations are as well as a the paper Greenlaw referenced in class, Rational Expectations and the Theory of Price Movementswritten by John Muth in 1961.

http://www.fep.up.pt/docentes/pcosme/S-E-1/se1_trab_0910/se1.pdf

http://www.fep.up.pt/docentes/pcosme/S-E-1/se1_trab_0910/se1.pdf