adaptive expectations


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Adaptive Expectations

A theory stating that economic actors make decisions based upon past, recent performance, regardless of the actual state of the economy. Thus, it takes economic actors some time to realize that a recession has ended or is beginning and to adjust their behavior accordingly. Adaptive expectations can result in large losses. See also: Rational expectations, Irrational exuberance.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

adaptive expectations (of inflation)

the idea that EXPECTATIONS of the future rate of INFLATION are based on the inflationary experience of the recent past. As a result, once under way, inflation feeds upon itself with, for example, trade unions demanding an increase in wages in the current pay round, which takes into account the expected future rate of inflation which, in turn, leads to further price rises. See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE, INFLATIONARY SPIRAL, RATIONAL EXPECTATIONS HYPOTHESIS, ANTICIPATED INFLATION, TRANSMISSION MECHANISM.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Policy and, yes, adaptive expectations could shift the curve.
Lastly, the few dynamic models currently available in the undergraduate curriculum focus exclusively on adaptive expectations for price setting.
THREE POSSIBLE MECHANISMS OF INCOMPLETE ADJUSTMENT Any or all of three possible mechanisms are likely driving the incomplete adjustment of expected inflation toward the 2 percent target: (i) backward-looking price setting, (ii) adaptive expectations (slow updating), and (iii) imperfect credibility.
They find that adaptive expectations have been one of the key determinants of inflation in Pakistan over the decades as well as in the period of 2005-06.
Later refinements by Mordecai Ezekiel, an agricultural economist working for the US government, linked price cycles to delays in adjusting production in response to changes in demand and prices (supply lags) coupled with expectations about future prices based on current and past prices (adaptive expectations).
The interest in the study of price dynamics has led Hommes [3] to extend the discrete time cobweb model by introducing adaptive expectations (Adaptive expectations have been introduced in the original cobweb model by Nerlove [10].) and nonlinear supply and demand curves.
Whatever the central bank's motivations, its attempt to lower the unemployment rate below [u.sub.n] is immediately self-defeating if the public has rational expectations and ultimately self-defeating under adaptive expectations. This self-defeating character of the Kydland-Prescott result highlights an asymmetry in the formulation of the problem.
They also prompted speculation over the existence of a "natural" rate of employment and theories of adaptive expectations and inflation acceleration.
Further, hypothesis tests on statistical models implied by conventional adaptive expectations do not suggest the prevalence of such behavior in the data.

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