Q: “Professor Sargent, can you tell me what CD rates will be in two years?” Sargent: “No.” - Thomas J. Sargent

It is paradoxical that an administration that came to office rejecting the whole apparatus of Keynesian economics finds itself presiding over a stream of what threaten to be permanent deficits.

An alternative “rational expectations” view denies that there is any inherent momentum in the present process of inflation. This view maintains that firms and workers have now come to expect high rates of inflation in the future and that they strike inflationary bargains in light of these expectations.

These ideas have implications not only for theoretical and econometric practices but also for the ways in which policymakers and their advisers think about the choices confronting them. In particular, the rational expectations approach directs attention away from particular isolated actions and toward choices among feasible rules of the game, or repeated strategies for choosing policy variables. While Keynesian and monetarists macroeconomic models have been used to try to analyze what the effects of isolated actions would be, it is now clear that the answers they have given have necessarily been bad, if only because such questions are ill-posed.