WHAT SURVIVES OF THE RATIONAL EXPECTATIONS REVOLUTION? Rational Expectations and Macroeconomics in 1984 By roBERT J barro* One of the cleverest features of the ra- booms. There are also some intriguing impli ional expectations revolution was the ap monetary policy--namely, th propriation of the term"rational "Thereby, systematic part does not matter(aside from he opponents of this approach were forced the inflation tax), and the erratic behavior into the defensive position of either being tends to be harmful irrational or of modeling others as irrational, The rational expectations theory of busi- neither of which are comfortable positions ess fluctuations and the empirical work that for most economists. In fact, much of the relates to this theory are surely interesting rational expectations view-that expecta- and suggestive. However, it seems a fair as tions are formed sensibly given the informa- sessment that this research has not provided tion that people have(and are motivated to a definitive analysis of either monetary non- acquire)has been generally accepted. This neutrality or of the business cycle more gen viewpoint has permanently and usefully al- erally. Consequently, this work has received tered the way that most macroeconomists much criticism, some of which has even been build models and carry out evaluations of insightful. But I should stress that the serious shifts in governmental behavior In this sense problems all arise in the attempt to explain the rational expectations revolution has tri- the nonneutrality of money, which is surely umphed decisively the hardest problem in macroeconomics The phrase, rational expectations macro- Some recent research, which I discuss later, economics, also suggests a particular theory suggests that the solution to this problem of business fluctuations. This well-known may not be as crucial for the understanding theory shows how incomplete information of business cycles as many of us used to about the quantity of money and the general think price level can lead to nonneutrality of mon- One troublesome aspect is the place of ey. Specifically, changes in money lead to rational expectations macroeconomics in the temporary confusions between general and often political debate over Keynesian eco- relative prices, which lead in turn to adjust- nomics. At least implicitly, many people feel ments of production and employment. Some that what's bad for the rational expectations extended versions of this model allow the viewpoint is good for the Keynesian one, and real effects of monetary disturbances to per- vice versa. But it is hard to see how the sist over periods that are long enough to problems in using the rational expectations correspond to real world recessions and approach to explain monetary nonneutrality an alleviate the theoretical and empirical shortcomings of the Keynesian model. This r of Economics, University of Chicago, 1126 model is basically an incomplete theory that E. 59th Street, Chicago, IL 60 rovides many prescriptions for activist expectations, although amidst sticky prices and rationed macro policies, but which retains some seri inconsistencies with the rational behar al consistency of this procedure-as Laurence Weiss ior of individuals. Specifically, no one has puts it, If one is willing to positreasonable'descrip- been able to use elements such as informa f how wages and prices are determined without tion and mobility costs-which are obvious that expectations can be similarly candidates for explaining the coordination oblems of private markets-in order te l79