Rational expectation

In economics, rational expectations are mathematical expected values ​​that result from the underlying economic model. This approach was originally developed by John F. Muth (1961) and later disseminated by Robert E. Lucas , who received the 1995 Nobel Prize in Economics for this theory .

The New Classical Macroeconomics , New Keynesianism, and financial market theory use rational expectations in particular .

Theory and economic policy statements

The core message of this theory is that rational expectations do not differ systematically or predictably from the mathematical results of the economic model used. It is therefore assumed that economic agents do not make systematic errors in relation to their expectations.

Assume that the equilibrium price is in a market and e is a stochastic process with an expected value of zero. The future equilibrium price is then ${\displaystyle P^{*}}$

${\displaystyle P=P^{*}+e}$,

and the rational expectation is

${\displaystyle E\{P\}=P^{*}}$.

Rational expectations were developed as a counter-hypothesis to adaptive expectations . Adaptive expectations are based on past observations and rely on the assumption that the underlying economic model is unknown. Rational expectations, on the other hand, assume knowledge of the true model and include all accessible information in the expectation formation. Rational expectations can be wrong, but the mistakes are random and not systematic.

criticism

Rational expectations presuppose knowledge of the true economic model. In addition, its parameters and the type of stochastic processes must be known. Many economists see these requirements as excessive. Economic subjects who believe they do not know the economic model, its parameters and the stochastic processes, learn from past values , while constantly correcting previous errors ( adaptive expectations ).

Other critics point out that obtaining information is expensive and that the formation of rational expectations, even if it were possible, is not necessarily rational in the ordinary sense of the word.

Furthermore, the assumption of rational expectations often leads to the existence of multiple or indeterminate equilibria. In such cases the theory of rational expectations fails.

literature

• Thomas Hielscher: Uncertainty, expectations and the hypothesis of rational expectations . In: Contributions to the discussion by the Department of Economics at the Free University of Berlin, Economics Series . No. 18 . Berlin 1999, ISBN 3-933225-63-9 ( online [PDF]).