7 Rational Expectations and the Lucas Critique
Although the Rational Expectations Hypothesis (REH) was advanced by Muth in 1961,
it was not until the early 1970s that it started to have a significant impact on time-series
econometrics and on dynamic economic theory in general. What brought the REH into
prominence was the work of Lucas (1972, 1973), Sargent (1973), Sargent and Wallace
(1975) and others on the new classical explanation of the apparent breakdown of the