These are the expectations formed in accordance with the actual process determining a variable conditional on the available information. In other words, Rational Expectations regarding a particular variable are those expectations which are formed taking in consideration all the available information regarding the actual processes determining the variable. The Rational Expectations about the value of a variable Y in period t, keeping in mind the values of other variables X, Z which affect Y can be formed in accordance with the following equation:
Yt = a0 + a1Yt-1 + a2Xt-1 + a3Zt-1
The theory of Rational Expectations finds its uses in various theories such as life cycle hypothesis, permanent income hypothesis, policy ineffectiveness proposition, efficient market theory of the stock prices, etc.
Call Us: USA +1 862 207 3288