Rational Expectations
What is Rational Expectations?
The assumption that people use all available information to forecast the future without systematic errors.
Understanding Rational Expectations
Developed by John Muth and brought into macroeconomics by Robert Lucas and others in the 1970s, rational expectations means people cannot be fooled repeatedly by predictable policy.
It explains why credible central bank commitments matter so much, and it is built into most modern macroeconomic models, including those in Romer's Advanced Macroeconomics.