ABSTRACT
If agents take decisions based on their beliefs about the future, the way they form expectations is central to economics. One view is that agents use the information available in the best way in order not to commit mistakes or not to persist in them. This is the general idea of rational expectations, which appears to describe how actual individuals decide. However, Robert Lucas adapted John Muth’s original formulation to macroeconomic models transforming it in a consistency axiom: agents in a model form expectations consistent with that model. Therefore, it has nothing to do with real-world agents and everything to do with the particular mathematical properties of economic models. This chapter shows the origins of the rational expectations hypothesis in the 1960s and its subsequent spread in macroeconomics, not only in academic circles but also in policymaking. The tension in its status (whether it was a hypothesis about actual behavior or about the behavior of fictitious agents in a model) persisted throughout, and has reached recent debates involving alternative expectation hypotheses discussed in other chapters of this handbook. The chapter also discusses some initial resistance to the rational expectations hypothesis and closes with its dominance in the macroeconomics literature from the 1980s to the early 2000s.
