One could have easily derived the impression from the last chapter that the sole topic of interest in rational expectations and macroeconomics was the question of aggregate supply or, more broadly, the division of nominal income into inflation and real GNP growth. Although the topic of aggregate supply has been of fundamental interest, the rational expectations revolution has touched on other aspects of macroeconomics. Indeed, the long-run contribution of the ideas from rational expectations could, in fact, be in these other areas rather than in the issues concerning aggregate supply.

In this chapter three important topics will be treated in detail: (1) models in which expectations are rational in some sectors of the economy but not in others; (2) time inconsistency in models in which expectations are formed rationally; and (3) the use of econometric models when agents form expectations rationally. Although each of these issues may seem disjoint from the others, they are united by a common theme – allowing for rational expectations, even in some sectors of the economy, fundamentally changes the use of economic models for explanation, forecasting, and control. A brief introduction to each of these topics is warranted.

A frequently advanced proposition from economists who are critical of flexible- price models of aggregate supply is that rational expectations modeling is more appropriate for some sectors of the economy than for others. Generally, financial-market efficiency has seemed to these economists to be more plausible than labor-or product-market efficiency because of the relative ease of arbitraging financial markets.