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The existence of rational expectations equilibrium: a retrospective

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  • Beth Allen
  • James S. Jordan

Abstract

This paper provides a selective review of theoretical research on the consistency of rational expectations equilibrium and its properties in microeconomic models. The general equilibrium framework is emphasized throughout the paper. After defining rational expectations equilibrium for a pure exchange economy, the paper presents a simple counterexample to illustrate that rational expectations equilibria need not exist. Results are summarized for the generic existence of fully revealing rational expectations equilibria in smooth economies satisfying additional dimensionality assumptions. Then the rational expectations equilibrium existence problem is related to earlier analysis of informationally decentralized allocation mechanisms. Next the efficiency properties of rational expectations equilibrium allocations are examined. Finally, the possibilities for partially revealing rational expectations equilibria are discussed.

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  • Beth Allen & James S. Jordan, 1998. "The existence of rational expectations equilibrium: a retrospective," Staff Report 252, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:252
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    References listed on IDEAS

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    Cited by:

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    3. Casella, Alessandra & Turban, Sébastien, 2014. "Democracy undone. Systematic minority advantage in competitive vote markets," Games and Economic Behavior, Elsevier, vol. 88(C), pages 47-70.
    4. Alexander Zimper, 2017. "Rationalizable Information Equilibria," Working Papers 201745, University of Pretoria, Department of Economics.
    5. Eduardo Dávila & Cecilia Parlatore, 2021. "Trading Costs and Informational Efficiency," Journal of Finance, American Finance Association, vol. 76(3), pages 1471-1539, June.
    6. Casella, Alessandra & Palfrey, Thomas & Turban, Sébastien, 2014. "Vote trading with and without party leaders," Journal of Public Economics, Elsevier, vol. 112(C), pages 115-128.
    7. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    8. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc.

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    Keywords

    Equilibrium (Economics) - Mathematical models; Rational expectations (Economic theory);

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