Editing Rational expectations (section)

==Implications==

Rational expectations theories were developed in response to perceived flaws in theories based on [[adaptive expectations]].  Under adaptive expectations, expectations of the future value of an economic variable are based on past values.  For example, it assumes that individuals predict inflation by looking at historical inflation data.  Under adaptive expectations, if the economy suffers from a prolonged period of rising inflation, people are assumed to always underestimate inflation. Many economists suggested that it was an unrealistic and irrational assumption, as they believe that rational individuals will learn from past experiences and trends and adjust their predictions accordingly.

The rational expectations hypothesis has been used to support conclusions about economic policymaking. An example is the [[policy ineffectiveness proposition]] developed by [[Thomas Sargent]] and [[Neil Wallace]]. If the Federal Reserve attempts to lower unemployment through expansionary [[monetary policy]], economic agents will anticipate the effects of the change of policy and raise their expectations of future inflation accordingly. This will counteract the expansionary effect of the increased money supply, suggesting that the government can only increase the inflation rate but not employment.

If agents do not form rational expectations or if prices are not completely flexible, discretional and completely anticipated, economic policy actions can trigger real changes.<ref>{{cite book |last=Galbács |first=Peter |title=The Theory of New Classical Macroeconomics. A Positive Critique |location=Heidelberg/New York/Dordrecht/London |publisher=Springer |year=2015 |isbn= 978-3-319-17578-2 |doi=10.1007/978-3-319-17578-2 |series=Contributions to Economics }}</ref>