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.

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.
References in periodicals archive ?
Lastly, the few dynamic models currently available in the undergraduate curriculum focus exclusively on adaptive expectations for price setting.
Formulated this way, Cournot is introducing adaptive expectations, where each player optimizes using last period's endogenous variables to predict what other players will do this period.
These include developing a network-based model of technological diffusion, and introducing financial market constraints and adaptive expectations of agents.
The empirical analysis based on OLS, GLS and GMM reveal that international oil prices, money supply, bilateral exchange rate of Pak-rupee with US-dollar, tax revenue collection as ratio of manufacturing sector value added, energy import-gap ratio and adaptive expectations are critical determinants, which positively contribute to the energy inflation.
Adaptive expectations models fell out of favour during the rational expectations revolution of the 1970s and 1980s, as they appeared to imply that investors would make systematic forecasting errors.
Further, hypothesis tests on statistical models implied by conventional adaptive expectations do not suggest the prevalence of such behavior in the data.
Abstract: This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model.
c) inflation induced by adaptive expectations (builtin inflation).
Cogley's (2002) exponentially smoothed (ES) measure of core inflation is based on the theory of adaptive expectations and by construction, responds strongly to 'sustained' movements in the general price level (see box 1).
4); determinism and irreversibility are likewise not equivalent concepts; and any path created by an idiosyncratic act of human agency is not the same as a sequence of economic changes involving large fixed costs, learning effects, coordination effects, and adaptive expectations in the sense used in path-dependence theory and research.
On the other hand, more sophisticated treatments of the adaptive expectations hypothesis, mostly appearing in the recent literature on learning in macroeconomic models, have found less tendency toward instability at low inflation rates.
226) asserts that "the sole evidence regarding Phillips's contribution to the theory of adaptive expectations rests on Leeson's report that Friedman communicated to him (orally or in writing, we are not told) that he got the idea from a conversation with Phillips which took place over four decades ago.

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