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The Early History of Rational and Implicit Expectations


Young, Warren & Darity, William A., Jr. (2001). The Early History of Rational and Implicit Expectations. History of Political Economy, 33(4), 773-813.


During the 1950s, three alternate models of endogenous expectations formation were developed: adaptive, rational, and implicit. While the first two are well known, the history of implicit expectations has not been dealt with, nor has the early history of rational expectations itself. The objects of this paper are, therefore, to survey the early development of these approaches, the reactions to them during the period of their dissemination, and their initial utilization. In the first section of the paper, we focus on the recollections of those who developed the models—John Muth and Edwin Mills—and those who were intimately involved in their development, including Herbert Simon, Marc Nerlove, Michael Lovell, and others. The recollections were collected by means of identical questions put to these personalities and supplementary questions based upon their initial replies, as will be seen below. In the second section, we will present the recollections of those who attended the December 1959 meeting of the Econometric Society where Muth and Mills presented papers outlining their alternative models. Again, identical questions were [End Page 773] put to those who participated at the meeting. In the third section, we provide the recollections of those who used the alternative approaches in a microeconometric testing program, such as Nerlove, and those who applied one or other of the models on the theoretical level in a general equilibrium model, such as Roy Radner and T. Negishi, and also those who initially used Muth's approach in a macroeconomic framework, such as Edwin Phelps and Robert Lucas. Before proceeding, however, a brief description of the three approaches—adaptive, implicit, and rational expectations—is called for.


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Journal Article

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History of Political Economy


Young, Warren
Darity, William A., Jr.

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