Rational Expectation Hypothesis
Economic agents take account all available information and make a rational prediction about future.
It assumes that economic agents do know what is going to happen in the future.
The expected value of a variable is equal to the value predicted by the economic model, plus a random error ei.
It holds that time averages calculated from past data will converge with the time average of any future realization.
The future is only a statistical reflection of past.
The function of rational expectation derived from the past data.
It involves Ergodic stochastic processes:
An ergodic stochastic process means that means calculated from past observations can not be systematically different from the means of future outcomes.
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