Reduced Forms of Rational Expectations Models

1. EXPECTATION SCHEMES

1. Expectations

1.1. Basic notions

The values taken by a variable of interest, denoted y, may be unknown. This occurs for instance when information is needed on future values of some economic characteristics or on variables that influence the behavior of agents. In such circumstances, one may look for proxies ỹ of y. These proxies are henceforth called predictions or expectations.

Expectations are generally determined by using the available information about some other variables summarized by the notation x. The prediction of y is then written as:

where f denotes the computational mechanism that describes the transition ...