The theory of rational expectations and the interpretation of macroeconomic data

This paper develops a model of expectations formation in which agents rationally choose to condition their expectations on a limited information set, in particular on information that they are likely to acquire freely as they participate in economic activity. The model offers an explanation for a number of empirical macroeconomic puzzles including the heterogeneity of expectations of inflation, and the sluggishness, excess sensitivity, excess smoothness and perversity of the reaction of macroeconomic variables to shocks.