Adaptive expectations

The theory of adaptive expectations is part of macroeconomics. It describes how expectations about economic variables are formed, and is in contrast to the theory of rational expectations.

Adaptive expectations are formed on the basis of observed values ​​from the past. For example: If inflation last year was higher than expected, as expectations of inflation for this year will be accordingly revised upwards, so adapted.

Suppose the expected inflation rate for this year and is the current inflation rate actually occurred, then the expected inflation rate for the next year:

With a number between 0 and 1. Today's expectations about inflation next year therefore corresponds to the expectation about inflation this year plus an error correction. The term, which expresses the error correction, the difference between the actual and the expected inflation rate today.

The theory of adaptive expectations can be extended to any number of past periods.

The actual inflation rate j years previously expressed. The current expected inflation therefore corresponds to the weighted arithmetic average of the inflation rates of all previous years.

In the AS- AD model, the adaptive expectations of the price level p and not relevant to the inflation rate (as opposed to DAD-SAS model).

Someone who makes adaptive expectations, knows neither the course of the supply or the demand function and therefore constantly commits in his expectation formation a systematic error. Critics of the theory of adaptive expectations, in particular John Muth have, therefore, an alternative model of expectation formation designed (see: Rational expectation).

• Macroeconomics