Why Policy Makers Should Not Rely Upon Rational Expectation Models

Macro economics has been dominated by the rational expectation theory advanced by Robert Lucas.  Most of the world's central banks use economic models derived from rational expectation theory.  Edmund Phelps won a Nobel Prize in economics in 2006.  In this interview he describes the assumption about expectations in their models.  He explains why the assumptions don't work and argues that it is foolish for central bankers or for Wall Street to use rational expectation models to make decisions.