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Rational Expectations and the Theory of Price Movements

John F. Muth
Econometrica
Vol. 29, No. 3 (Jul., 1961), pp. 315-335
Published by: The Econometric Society
DOI: 10.2307/1909635
Stable URL: http://www.jstor.org/stable/1909635
Page Count: 21
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Rational Expectations and the Theory of Price Movements
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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.

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