Macroeconomics Amidst Sense and Nonsense

Abstract

This paper attempts to place the so-called Rational Expectations Revolution in macroeconomics into proper perspective regarding its implications both for policy analysis and econometric modelling. It is concluded that Rational Expectations is of much less practical importance to policy analysis than is commonly thought. The aspect of Rational Expectations known as the Lucas Critique, however, must be considered seriously in the process of econometric modelling, although its practical import may be far less sweeping than its proponents claim.