On the Rationality of the Rational Expectations Hypothesis

Trevor R Stegman

Australian Economic Papers, 1985, vol. 24, issue 45, 350-55

Abstract: This note argues that the claim that the rational expectations hypothes is is a method of endogenizing the process of expectations formation, which is based on the principles of optimization, is not justified. The essential model-in dependent property of the rational expectations hypothesis is that forecasts are unbiased. It is shown that, since costs of error are likely to be correlated with error magnitude, unbiasedness is not a necessary property of a rational forecast and bias will be positively desirable when error costs are asymmetric or there are restrictions on the possible values of the variable to be forecast. Copyright 1985 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Date: 1985
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