Editing Rational expectations (section)

== Criticism ==
While the rational expectations theory has been widely influential in macroeconomic analysis, it has also been subject to criticism:

'''Unrealistic assumptions''': The theory implies that individuals are in a fixed point, where their expectations about aggregate economic variables on average are correct. This is unlikely to be the case, due to limited information available and human error.<ref name=":1">{{Cite journal |last=Mankiw |first=N.G |date=2006 |title=The Macroeconomist as Scientist and Engineer |journal=Journal of Economic Perspectives |volume=20 |issue=4 |pages=29–46 |doi=10.1257/jep.20.4.29 |url=https://pubs.aeaweb.org/doi/pdf/10.1257%2Fjep.20.4.29}}</ref>

'''Limited empirical support''': While there is some evidence that individuals do incorporate expectations into their decision-making, it is unclear whether they do so in the way predicted by the rational expectations theory.<ref name=":1" />

'''Misspecification of models''': The rational expectations theory assumes that individuals have a common understanding of the model used to make predictions. However, if the model is misspecified, this can lead to incorrect predictions.<ref>{{Cite journal |last=Romer |first=David |date=2000 |title=Keynesian Macroeconomics without the LM Curve |journal=Journal of Economic Perspectives |volume=14 |issue=2 |pages=149–170 |doi=10.1257/jep.14.2.149 |url=https://pubs.aeaweb.org/doi/pdf/10.1257/jep.14.2.149}}</ref>

'''Inability to explain certain phenomena:''' The theory is also criticized for its inability to explain certain phenomena, such as 'irrational' bubbles and crashes in financial markets.<ref>{{Cite web |last=Shiller |first=R.J |date=1980 |title=Do stock prices move too much to be justified by subsequent changes in dividends? |url=https://www.nber.org/system/files/working_papers/w0456/w0456.pdf}}</ref>

'''Lack of attention to distributional effects:''' Critics argue that the rational expectations theory focuses too much on aggregate outcomes and does not pay enough attention to the distributional effects of economic policies.<ref name=":1" />