Rational Expectations and the Theory of Price Movements

TLDR

Expectations of economic variables may be subject to error, a recognized factor in business activity explanations, and the ex ante Stockholm School offers a suggestive short‑run approach. The study proposes that expectations are essentially the predictions of the relevant economic theory, asserting that the economy does not waste information and that expectations depend on the system’s structure. The analysis applies methods appropriate under special conditions to an isolated market with a fixed production lag, and illustrates the hypothesis by incorporating commodity speculation. Introducing commodity speculation demonstrates the interpretative value of the hypothesis. No additional information provided.

Abstract

In order to explain fairly simply how expectations are formed, we advance the hypothesis that they are essentially the same as the predictions of the relevant economic theory. In particular, the hypothesis asserts that the economy generally does not waste information, and that expectations depend specifically on the structure of the entire system. Methods of analysis, which are appropriate under special conditions, are described in the context of an isolated market with a fixed production lag. The interpretative value of the hypothesis is illustrated by introducing commodity speculation into the system. 1. INTRODUCTION THAT EXPECTATIONS of economic variables may be subject to error has, for some time, been recognized as an important part of most explanations of changes in the level of business activity. The ex ante analysis of the Stockholm School-although it has created its fair share of confusion-is a highly suggestive approach to short-run problems. It has undoubtedly been a