Meaning: The quote "The first and most optimistic response was complete rational expectations econometrics. A rational expectations equilibrium is a likelihood function. Maximize it." by Thomas Sargent, an economist, encapsulates the essence of rational expectations econometrics and its application in economic modeling and analysis.

Rational expectations econometrics is a school of economic thought that gained prominence in the 1970s, particularly through the work of economists such as Robert Lucas and Thomas Sargent. It is based on the concept of rational expectations, which posits that individuals form expectations about the future in a rational and forward-looking manner, taking into account all available information and using the best available forecasting techniques.

At the heart of rational expectations econometrics is the notion of equilibrium. In economic models, an equilibrium is a state where the actions of individuals and firms are consistent with each other, and there is no incentive for any agent to change their behavior. Rational expectations equilibrium, therefore, refers to a situation where individuals' expectations about the future are consistent with the predictions of the economic model.

The quote suggests that the first and most optimistic response to the concept of rational expectations econometrics was to approach it through the lens of complete rational expectations econometrics. This approach entails the use of econometric techniques (statistical methods applied to economic data) to model and analyze economic phenomena under the assumption of complete rational expectations.

A key concept in this approach is the likelihood function. In statistics and econometrics, the likelihood function represents the probability of observing a given set of data, given a specific statistical model and its parameters. In the context of rational expectations econometrics, the likelihood function is used to quantify the fit of the model to the data, and the goal is to maximize this likelihood function.

By maximizing the likelihood function, economists aim to estimate the parameters of the model in a way that is consistent with the rational expectations of economic agents and the observed data. This approach aligns with the broader theme of rational expectations, which emphasizes the importance of incorporating agents' rational forecasts into economic modeling and policy analysis.

Thomas Sargent, as an influential economist in the field of rational expectations, has contributed significantly to the development and application of these concepts. His work, along with that of other prominent economists, has shaped the way in which economic research and policy analysis are conducted, particularly in the realms of macroeconomics, monetary policy, and the understanding of economic fluctuations.

In summary, the quote highlights the foundational principles of rational expectations econometrics and the emphasis on rational expectations equilibrium as a likelihood function to be maximized. It underscores the pivotal role of econometric techniques in capturing and analyzing the implications of rational expectations in economic modeling. Thomas Sargent's contributions to this area of research have been instrumental in advancing our understanding of how individuals' rational expectations shape economic outcomes and policy implications.