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Economists have developed models in which individuals form expectations of key variables in a 'rational' manner such that these expectations are consistent with actual economic environments. Professor Sheffrin first explores the logical foundation of the concept and the case for employing it in economic analysis. Subsequent chapters investigate its use in macroeconomics, financial markets, and microeconomics. A final chapter assesses its impact on theoretical and empirical work in economics and policy arenas. The author argues that while rational expectations are still central to macroeconomic policy debates, fully workable models have not yet been devised, and offers reasons for the lack of practical and conceptual progress. All chapters of the second edition have been revised or expanded. New sections inter alia include material on learning, the rationality of reported expectations, alternative recent developments explicitly or implicitly using rational expectations, new tests of the Lucas critique, and models of noise trading. The book is written in a non-technical fashion for beginning graduate students and non-specialists

A player i's actions in a game are determined by her beliefs about other players; these depend on the game's real-life context, not only its formal description. Define a game situation as a game together with such beliefs; call the beliefs—and i's resulting expectation—rational if there is common knowledge of rationality and a common prior. In two-person zero-sum games, i's only rational expectation is the game's value. In an arbitrary game G, we characterize i's rational expectations in terms of the correlated equilibria of the doubled game 2G in which each of i's strategies in G appears twice. (JEL C72, D83, D84)

The process of formation of electoral expectations in proportional representation systems is analysed in this article. Contrary to Duvergerian or electoral coordination theories, by using survey and in-depth elite interview data from Spain in the 1970s and 1980s, it is shown that strategic voting depends on heuristics (i.e. extrapolations from the previous election) rather than on rational expectations. The main implication is that strategic voting is possible in large districts.

The paper considers the importance of reputation in relation to disinflationary policies in a continuous time ration expectations model, where the private sector has incomplete information about the true preferences of the government. It is proved that there is a unique equilibrium with the important property that the costs of disinflation arise in the start of the game where the policy has not yet gained credibility. ; Published in connection with a visit at the IIES.