Expectations Before the Rational Expectations Revolution
Expectations Before the Rational Expectations Revolution
This chapter reviews a number of expectations theories that preceded the rational expectations hypothesis (REH). It first considers R. Cantillon's views on the role of expectations in economics, especially with respect to the augmentation and diminution of coins in denomination. It then examines the perceived role of expectations in human psychology, expectations models liable to be confronted with empirical data, and the REH's proposal that economic agents form their expectations rationally, that is, by using “the” one and only correct (neoclassical) model of the economy. It also explores the arguments advanced by economists such as Knut Wicksell, John Maynard Keynes, Frank Knight, and Friedrich Hayek, who stressed the importance of expectations explicitly, as regards cyclical fluctuations, be it in economic activity or in financial markets. The chapter concludes by discussing early attempts to quantify expectations.
Keywords: expectations, rational expectations hypothesis, R. Cantillon, economics, coins, human psychology, John Maynard Keynes, Friedrich Hayek, cyclical fluctuations, financial markets
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