John Muth

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John Muth
Born	(1930-09-27)September 27, 1930
Died	October 23, 2005(2005-10-23) (aged 75) Alexander Henderson Award (1954)
Information at IDEAS / RePEc

John Fraser Muth (/mjuːθ/; September 27, 1930 – October 23, 2005) was an American economist. He is "the father of the rational expectations revolution in economics", primarily due to his article "Rational Expectations and the Theory of Price Movements" from 1961.

Muth earned his

. He was affiliated with Carnegie Mellon as a research associate from 1956 until 1959, as an assistant professor from 1959 to 1962, and as an associate professor without tenure from 1962 to 1964. He was a full professor at Michigan State University from 1964 to 1969 and a full professor at Indiana University from 1969 until his retirement in 1994.

Muth asserted that expectations "are essentially the same as the predictions of the relevant economic theory." Although he formulated the

, and others.

Rationalization of Friedman's adaptive expectations model

Rudolf Kálmán

in his paper from the same year.

In his paper "Optimal Properties of Exponentially Weighted Forecasts", which was published in the Journal of the American Statistical Association in 1960, Muth rationalized Friedman's adaptive expectations model for permanent income. He did this by reverse engineering a stochastic process for income for which Cagan's expectation formula equals a mathematical expectation of future values conditioned on the infinite history of past incomes. Among Muth's insights was that the stochastic process being forecast should dictate both the distributed lag and the conditioning variables that people use to forecast the future.

Hypothesis of rational expectations

In "Rational Expectations and the Theory of Price Movements", published in 1961, Muth put forward his hypothesis, in contrast to Simon, that "expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory." Muth continued, "At the risk of confusing this purely descriptive hypothesis with a pronouncement as to what firms ought to do, we call such expectations rational."

Muth's notion was that the professors [of economics], even if correct in their model of man, could do no better in predicting than could the hog farmer or steelmaker or insurance company. The notion is one of intellectual modesty.... The common sense is "rationality": therefore Muth called the argument "rational expectations".

— 

ISBN 978-0-299-15814-9

.

Legacy

Muth's works influenced almost every area of economic research into dynamic problems.

Of course we knew about [rational expectations]. Muth was a colleague of ours [in the early 1960s]. We just didn't think it was important. The hypothesis was more or less buried during the '60s.

ISBN 0-86598-146-9

.