Dr. Christopher House on Rational Expectations

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I found Dr. House’s new blog via Noah Smith, and saw this great article from Dr. House today on rational expectations.I have heard of rational expectations in my basic undergrad courses, but we haven’t gotten deeply into it.  I regard that as one of the most dangerous things to do in an academic field – to introduce things early but not adequately explain them.  In my experience it opens the door for students to make a lot of assumptions because some won’t be interested in exploring it on their own, and others won’t know where to look.  So this quick primer on RE was wonderful.

As Dr. House explains:

I’m going to use this post to discuss the meaning of rational expectations because (1) I think it is one of the most commonly misunderstood aspects of macroeconomics and (2) for the most part, rational expectations is essentially true in the real world – that is to say, most people actually have rational expectations.

The notion of rational expectations that I prefer (what I might call the weak-form of RE) goes something like this:  People have rational expectations if their beliefs are … consistent with the world they live in.

Now, the only reason I know weal-form RE is because Dr. Krugman has referenced it on his blog, and I’ve seen it on other blogs as well.  Still more of a mention that an outright explanation.  If you are in a similar boat, of knowing that RE exists but not really knowing what it is or why it’s important to economics, please read the entire post.  I feel like I understand the concept much better now after reading Dr. Houses’s post, and I’ve saved it for the future so I can refer back to it in.

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