Preface

Summary

The first edition of Rational Expectations was published more than twelve years ago. At that time, some of the implications of rational expectations for developments in macroeconomics were unclear, and the first edition made some forecasts of future developments. For the most part, these forecasts proved to be rational, although not perfect.

Looking back, I probably underestimated the extent to which the rational expectations hypothesis would become the standard assumption in theoretical analysis in all areas of economics and overestimated the extent to which it would prove useful in macroeconomic policy analysis. From a rather controversial beginning, the rational expectations hypothesis is firmly embedded in the economist's theoretical tool kit. The hard work of building economic models that embody rational expectations and an agreed-on structure of the economy continues at a slow pace.

In preparing this second edition, I preserved the basic structure and level of the first edition. Although the technical level required in the profession has risen, there are other places to learn those skills and techniques. The changes and additions that were made for this edition focus on new ideas and avenues of research.

To those readers familiar with the first edition, here are the significant changes: The first chapter adds material on learning as well as reports on additional research on the rationality of reported expectations. The second chapter reviews the work that contributed to the demise of the original, flexible-price, rational expectations macro model as well as sketching some alternative recent developments in macroeconomics that explicitly or implicitly use rational expectations.