Staff Report 252

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The Existence of Rational Expectations Equilibrium: A Retrospective

Beth Allen
James S. Jordan

Published August 1, 1998

Abstract
This paper provides a selective review of theoretical research on the consistency of rational expectations equilibrium and its properties in microeconomic models. The general equilibrium framework is emphasized throughout the paper. After defining rational expectations equilibrium for a pure exchange economy, the paper presents a simple counterexample to illustrate that rational expectations equilibria need not exist. Results are summarized for the generic existence of fully revealing rational expectations equilibria in smooth economies satisfying additional dimensionality assumptions. Then the rational expectations equilibrium existence problem is related to earlier analysis of informationally decentralized allocation mechanisms. Next the efficiency properties of rational expectations equilibrium allocations are examined. Finally, the possibilities for partially revealing rational expectations equilibria are discussed.


Published In: Organizations with incomplete information: Essays in economic analysis: A tribute to Roy Radner (1998, pp. 42-60)

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