The theory of rational expectations and the interpretation of macroeconomic data

This paper develops a model of expectations formation in which agents rationally choose to condition their expectations on a limited information set, in particular on information that they are likely to acquire freely as they participate in economic activity. The model offers an explanation for a number of empirical macroeconomic puzzles including the heterogeneity of expectations of inflation, and the sluggishness, excess sensitivity, excess smoothness and perversity of the reaction of macroeconomic variables to shocks. (c) 2006 Elsevier Inc. All rights reserved.