Rational Expectations and the Dynamic Structure of Macroeconomic Models:A Critical Review

The recent literature on rational expectations in macroeconomic theory is surveyed here with the objective of distilling from the various papers useful suggestions for econometric methodology. The paper is not concerned with the empirical questions with which these models have been associated, but rather with the value and usefulness of the concept of rational expectations. The paper begins with a brief discussion of the theory of martingales as it has been applied to microeconomic theory. Then, the general linear rational expectations model (of which most models discussed in the literature are, in terms of their structure, special cases) is developed arid its properties, advantages and drawbacks discussed. The paper concludes with a discussion of the possibilities for estimation arid application of such linear models.