Adaptive expectations

Adaptive expectations are forecasts revised gradually in response to errors between earlier predictions and observed outcomes. The model makes expectations depend on past information rather than being fully forward-looking.

Expectations: Beliefs about future states or outcomes that guide decisions under uncertainty. Adaptive expectations are one specific way economic agents form beliefs about the future.
Adaptive expectations hypothesis: The hypothesis that economic agents form expectations by adjusting past forecasts toward observed outcomes. This names the forecasting assumption used in the model's classic macroeconomic applications.
Rational expectations: The hypothesis that expectations use available information consistently with the model of the economy. Unlike adaptive expectations, it does not restrict forecasts to gradual adjustment from past errors.
John Muth: An American economist who introduced the rational-expectations hypothesis in 1961. Muth's proposal challenged simple backward-looking rules such as adaptive expectations.
Expectations-augmented Phillips curve: A Phillips curve relation in which expected inflation shifts the trade-off between inflation and unemployment. The model uses lagging inflation expectations to explain short-run unemployment effects.
Phillips curve: A relationship between inflation or wage growth and unemployment, studied in macroeconomics. Adaptive expectations help explain why this relationship may hold temporarily but shift over time.
Static expectations: The assumption that a variable's expected future value equals its current value. This simpler rule fixes expectations rather than revising them after forecast errors.
Milton Friedman: An American economist who developed influential analyses of consumption, monetary policy, and inflation. Friedman's expectations-augmented Phillips curve made backward-looking inflation expectations central to macroeconomic analysis.
Inflation inertia: The persistence of inflation over time, so past inflation helps predict current inflation. Slow expectation adjustment can carry past inflation into current wage and price decisions.
Wage-price spiral: A process in which wage increases and price increases reinforce one another. Workers and firms adjusting expectations from past inflation can perpetuate this feedback.

Linked from 6 pages