Rational Expectations and Macroeconomics in 1984

Abstract

One of the cleverest features of the rational expectations revolution was the appropriation of the term rational. Thereby, the opponents of this approach were forced into the defensive position of either being irrational or of modeling others as irrational, neither of which are comfortable positions for most economists. In fact, much of the rational expectations view-that expectations are formed sensibly given the information that people have (and are motivated to acquire)-has been generally accepted. This viewpoint has permanently and usefully altered the way that most macroeconomists build models and carry out evaluations of shifts in governmental behavior. In this sense the rational expectations revolution has triumphed decisively.' The phrase, rational expectations macroeconomics, also suggests a particular theory of business fluctuations. This well-known theory shows how incomplete information about the quantity of money and the general price level can lead to nonneutrality of money. Specifically, changes in money lead to

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