I am struggling understanding the concept of rational expectations. Can someone explain in simple words the concept of rational expectations? Does someone know a good (online) source explaining rational expectations?
The concept of rational expectations can indeed be confusing.
One of the nicest pieces that I read online on rational expectations is the following:
It very nicely describes the concept of rational expectations in very simple words.
The most important thing one needs to understand is that rational expectations do not imply that all people act optimal under all circumstances, it rather implies that people behave optimally given the information they have.
The concept of rational expectations asserts that outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be. The concept is motivated by the same thinking that led Abraham Lincoln to assert, “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” From the viewpoint of the rational expectations doctrine, Lincoln’s statement gets things right. It does not deny that people often make forecasting errors, but it does suggest that errors will not persistently occur on one side or the other.
from Tomas Sargent (https://www.econlib.org/library/Enc/RationalExpectations.html)
Rational Expectations - as opposed to Adaptive Expectations - is a theoretical framework in which agents form expectations not solely based on past experiences but also on current information, priors and what they think is going to happen.
It doesn't imply perfect prediction of the future, just that a policymaker can't systematically fool agents, at the risk of losing credibility. This was a big leap forward in terms of macroeconomic theory in the 70s.
EDIT: Mark's comment reminded me of an important aspect of RE. Before it, models assumed agents didn't know the model. Part of the Lucas Critique is that policymakers can't statically estimate parameters and think that agents aren't responsive to policy trying to explore trade-offs and induce certain states.
I will provide an actual answer because I strongly believe that embedding the rational expectations (RE) assumption into macroeconomic models is ridiculous.
I will try to crystalize this in a concise way. Anytime we try to use a macroeconomic model to forecast outcomes we are actually creating a model that incorporates, via probability distribution, all possible outcomes. RE assumes that nothing unforeseen occurs (it is whenever nothing unforeseen occurs that rational agents can act optimally) and that rational agents are then able to compute profit maximizing choice paths. Further, any behavioral deviations necessarily produce sub-optimal paths for choice variables. This is akin to assuming that all economic actors know the model governing the DGP within which they operate. And this yields (2): agents can only form RE whenever they know the true specification of the economic model governing their world and its exact parameterization. You decide for yourself if you think these are good assumptions.
This yields an extreme (and perhaps dangerous) system of thinking; the supposition that economic models ought to consistently provide reliable quantitative predictions about future outcomes, for example. It is also ironic that modern macroeconomists micro-found current models to attain quantitative predictions over an ordinal outcome.
See the work of Roman Frydman. A good starting point is "Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium". AER, 1982.
You might also look into the behavioral and experimental macroeconomics literature.
edit: I will add -- Evans, G. W. and G. Ramey (2006) Adaptive Expectations, Under parameterization and the Lucas Critique. Journal of Monetary Economics for assertion (2)
edit2: My memory was incorrect and erik (below in comments) is correct. Frydman didn't win the NP. It was his co-founder of his institution at Columbia university Edmund Phelps.