Rational Expectations and Monetary Institutions

The concept of ‘monetary regime figures prominently in the recent rational expectations literature. Elsewhere,1 I have used the following two-part definition of it: a monetary régime is a system of expectations that governs the behaviour of the public and that is sustained by the consistent behaviour of the policy-making authorities. This is a rational expectations concept although, as the rational expectations literature tends to go, it is stated here in fairly loose language. The present definition assumes that people understand the systematic components of the authorities’ behaviour in a general sort of way, but avoids a linkage so tight as to build, for example, short-run neutrality or policy ineffectiveness assertions into the concept itself. Nonetheless, it is in effect an equilibrium concept. The expectations of the public and the actual behaviour of the authorities mesh in equilibrium; when they do not mesh, it does not make sense to speak of a régime.