Introduction

Abstract

Throughout the last two decades, expectations formation has been at the heart of macroeconomic research. In particular, following the work of Muth (1961), attention has been concentrated on the concept of rational expectations i.e. that agents form expectations consistent with their knowledge of the underlying processes of the economic system and taking into account all available information. The rational expectations hypothesis has sufficiently penetrated all areas of macroeconomic theory and applied work to have caused a “revolution in macroeconomics” according to Begg (1982). Developments in macroeconomic theory are usually incorporated, sooner or later, into large-scale macroeconomic models. In the United Kingdom there are now three large, nonlinear, empirical, macroeconomic forecasting models which incorporate rational expectation terms as part of their basic structure.