Kydland and Prescott argued that due to this concept, discretionary monetary policy is never ‘credible' and thus ineffective.
The first use of this in a macro-economic model appears in the article "Investment Under Uncertainty," which uses the concept of an equilibrium of this type. Firms invest given a prior belief about the distribution of output prices, and given aggregate investment, the prior and posterior distributions of market prices are identical, or equivalently, the first moment of agents' forecast error is zero. Kydland and Prescott argued that due to this concept, discretionary monetary policy is never ‘credible' and thus ineffective. This concept motivates a critique of macro-econometric models in the style of Katz and Tinbergen since in those models, agents don't change their behavior in response to policy changes. That critique is named after one of the authors of "Investment Under Uncertainty," Robert Lucas. For ten points, what is this economic concept, which caused an eponymous "revolution" in 1970s macroeconomics?
The first use of this in a macro-economic model appears in the article "Investment Under Uncertainty," which uses the concept of an equilibrium of this type.
{Rational Expectations}