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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.
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]
John Fraser Muth (/ m j uː θ /; September 27, 1930 – October 23, 2005) was an American economist.He is "the father of the rational expectations revolution in economics", primarily due to his article "Rational Expectations and the Theory of Price Movements" from 1961.
Sargent is one of the leaders of the "rational expectations revolution," which argues that the people being modeled by economists can predict the future, or the probability of future outcomes, at least as well as the economist can with his model. Rational expectations was introduced into economics by John Muth, [9] then Robert Lucas, Jr., and ...
The concept of rational expectations was originally used by John Muth, [10] and was popularized by Lucas. [11] One of the most famous new classical models is the real business cycle model, developed by Edward C. Prescott and Finn E. Kydland.
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.
The backward nature of expectation formulation and the resultant systematic errors made by agents (see cobweb model) had become unsatisfactory to economists such as John Muth, who was pivotal in the development of an alternative model of how expectations are formed, called rational expectations. The use of rational expectations have largely ...
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 ...