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What, then is the rational expectations theory of interest rates? How does it differ from earlier...

What, then is the rational expectations theory of interest rates? How does it differ from earlier interest-rate determination theories, such as The Classical, Liquidity Preference and Loanable Funds ideas?

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What, then is the rational expectations theory of interest rates?

According to this theory an individual makes decision on the basis of best available information and from past trends. It provides the explanation in relation between short term and long term interest rates. It has also assumption that one has all the access available for the required public information to take decision.

How does it differ from earlier interest-rate determination theories, such as The Classical, Liquidity Preference and Loanable Funds ideas?

  • Here Classical, Liquidity Preference theory says the interest is the price for money that one is ready to pay while rational expectations theory says what is ideal on the basis on best available information and from past trends.
  • Here Loanable funds approach interest rate is determined by the Demand and supply. Higher the demand higher the interest rate while rational expectations theory decides the interest rates on the basis of past trends and best available information.

jeff jeffy answered 1 year ago
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