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The concept of rational expectations was first introduced by John F. Muth in his paper "Rational Expectations and the Theory of Price Movements" published in 1961. Robert Lucas and Thomas Sargent further developed the theory in the 1970s and 1980s which became seminal works on the topic and were widely used in microeconomics.
The policy-ineffectiveness proposition (PIP) is a new classical theory proposed in 1975 by Thomas J. Sargent and Neil Wallace based upon the theory of rational expectations, which posits that monetary policy cannot systematically manage the levels of output and employment in the economy.
New classical economics is based on Walrasian assumptions. All agents are assumed to maximize utility on the basis of rational expectations. At any one time, the economy is assumed to have a unique equilibrium at full employment or potential output achieved through price and wage adjustment. In other words, the market clears at all times.
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. However, the two schools differ in that New Keynesian analysis usually assumes a variety of market failures.
The Taylor contract came as a response to results of new classical macroeconomics, in particular the policy-ineffectiveness proposition proposed in 1975 by Thomas J. Sargent and Neil Wallace [3] based upon the theory of rational expectations, which posits that monetary policy cannot systematically manage the levels of output and employment in the economy and that monetary shocks can only give ...
Robert Hall was the first to derive the effects of rational expectations for consumption. His theory states that if Milton Friedman’s permanent income hypothesis is correct, which in short says current income should be viewed as the sum of permanent income and transitory income and that consumption depends primarily on permanent income, and if consumers have rational expectations, then any ...
Lucas (1972) incorporated the idea of rational expectations into a dynamic macroeconomic models. The agents in Lucas's model are rational: based on the available information, they form expectations about future prices and quantities, and based on these expectations they act to maximize their expected lifetime utility. [ 18 ]
The Lucas islands model is an economic model of the link between money supply and price and output changes in a simplified economy using rational expectations. It delivered a new classical explanation of the Phillips curve relationship between unemployment and inflation. The model was formulated by Robert Lucas, Jr. in a series of papers in the ...