Optimally Rational Expectations and Macroeconomics

Abstract

This paper provides an alternative to the theory of rational expectations (RE). Its central idea is that the information set on which agents will choose to condition their expectations will not, in general, include all the available information. Our alternative has many of the attractive features of RE; it emerges from an explicit choice-theoretic framework; it has wide applicability; and it can in principle explain the failure of models incorporating RE to account for the dynamics of many macroeconomic relationships.Rational expectations, incomplete information, macroeconomic dynamics