explain adaptive versus rational expectations

In sum, if economic agents have rational expectations, since the economy never diverges from the long run aggregate supply curve, demand management policy–using monetary and fiscal policy to influence aggregate demand, and thus, real GDP and employment–can never be effective. In a nutshell, Adaptive Expectations imply that, when deciding what price level to expect next year, people form their expectations by looking back at what happened in the past. RATIONAL EXPECTATIONS vs. ADAPTIVE BEHAVIOR IN A HYPERINFLATIONARY WORLD: EXPERIMENTAL EVIDENCE Ramon Marimon Shyani Sunder U ni versity of Minnesota June, 1988 * A preliminary report of this work was presented at the Conference on Learning from Endogenous Data, Center for Analytic Economics, First of all, we look at whether there is a convergence to the rational equilibrium even if agents have adaptive expectations, according to the main results of Palestrini and Gallegati (2015). Rational expectations ensure internal consistency in models involving uncertainty. A useful way to start thinking about Adaptive vs. Change ), You are commenting using your Facebook account. Request PDF | Adaptive expectations versus rational expectations: Evidence from the lab | The aim of the present work is to shed light on the extensive debate about expectations in financial markets. There was a time where macroeconomics was ruled by adaptive (or backward-looking) expectations, like the much-ridiculed chartists. A simple formula for adaptive expectations is Pe = Pt. Why would a monetary expansion increase output within a Rational Expectations framework? A common example is for predicting inflation. Rational expectation is an economic hypothesis stating that the individuals in the economy make decisions based on their rational outlook, available information, past experiences and on their predictions about the effects of … The results show that players fail to predict the fundamental value and that agents have adaptive expectations rather than rational ones. The natural rate hypothesis, which we learned about in an earlier section, argues that while there may be a tradeoff between inflation and unemployment in the short run, there is no tradeoff in the long run. The predictions may not always be right, but people should learn over time and improve their predictions. (Or perhaps rational expectations is simply more … Notice that “v” is a parameter that measures how quickly expectations are revised. In the simple Keynesian model of an economy, the aggregate supply curve (with variable price level) is of inverse L-shape, that is, it is a horizontal straight line up to the full-employment level of output and beyond that it becomes horizontal. This implication, combined with rational expectations RE, is strongly rejected. Each period, workers and firms set real wages for the following year, at the level necessary to keep that year’s labor market in equilibrium. In economics, adaptive expectations is a hypothesized process by which people form their expectations about what will happen in the future based on what has happened in the past. adaptive expectations), RE remains the standard way to treat Or equivalently, when there is an unexpected change in inflation. In Econometric Decision Models (pp. Adaptive Expectations became a strong weapon for the Monetarists to attack the Keynesian’s use of the Phillips Curve as a way to guide policy. -1 This states people expect inflation will be the same as last year. The rational expectations theory is a concept and theory used in macroeconomics. Change ), You are commenting using your Twitter account. Then, today policymakers face a tough decision: if they “normalize” policy and return unemployment to its natural rate, people’s expectations are still assuming an inflation rate of 10% (after all, that’s what it is today), so output will return to normal but inflation will persist at 10%. Even if there are other ways to model expectations (i.e. Agents know the same economic model that policymakers do, so that, given sufficient information, they will know exactly what inflation will be next year. Imagine you’re a shoemaker, who has a store in a street populated by other shoemaking stores. Rational Expectations, the Efficient Market Hypothesis, and the Santa Fe Artificial Stock Market Model Leigh Tesfatsion Department of Economics ... Adaptive Expectations: Expectations are formed on the basis of past experiences only, typically as some kind of weighted average of past observations. Adaptive expectations and rational expectations are hypotheses concerning the formation of ... explain why the hypothesis of rational expectations is strongly rejected by the data. Differentiate between Rational and Adaptive Expectations and clearly explain their role in focusing on future macro-economic variables 1. Another interpretation: let’s consider a monetary expansion. I started this site in order to summarize the main lessons of different books I happen to be reading from the economic literature. Rational Expectations is to consider the historical context in which these theories developed. To obtain consistency within a model, the … If “v” is low, people are slow to alter their history-based notions of inflation. Inflation and Unemployment: Phillips Curve and Rational Expectations Theory! E_t [π (t+1)] = E_t-1 [π(t)] – v * { π(t) – E_t-1 [π(t)] }. They don’t need to look into the past, only find out what the government’s plans are today. The mainstream DSGE models are basically RE multivariate models. AD expands way more than they’d thought, then real wages will fall. 3.3.1 Modeling the Rational Expectations. In our adaptive expectations model, agents form forecasts of future capital stock based … ( Log Out /  In versions of the Phillips Curve, developed by Milton Friedman, the trade-off between inflation and unemployment assumes adaptive expectations. Is “v” is high, people incorporate recent events almost completely and immediately. When the rational expectations hypothesis is satisfied, a continuum of equilibria have paths converging to the stationary equilibrium with a higher inflation; conversely, when adaptive behavior is shown by agents, a continuum of inflation paths converge to the lower inflation --Pareto superior-- stationary equilibrium … Adaptive expectations theory says that people use past information as the best … For example, if inflation has been higher than expected in the past, people would revise expectations for the future. These questions led to the theory of rational expectations. Rational Expectations The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. Combined with adaptive expectations, it is accepted. The basic idea is simple enough. A useful way to start thinking about Adaptive vs. Well, as you explain it, it seems to me that, by providing those answers, rational expectations is less empirical than adaptive expectations, perhaps to the vanishing point. Then in the '60s, Friedman and the Monetarists shattered the Keynesian academic dominance and… It is also known as backward thinking decision-making.Adaptive expectations can be used to predict inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set peri… So if inflation has always averaged 5% over the past decade, it’s likely that people’s expectations today (Year 0) will be that inflation next year (Year 1) should also be close to 5%. Moreover, we concentrate on the accuracy of aggregate forecasts compared with individual forecasts. When are output and unemployment not at these respective levels? Adaptive expectations isn’t — you still have to make more choices after deciding to assume adaptive expectations. Rational Expectations •The rational expectations theory is often used to explain expected rates of inflation. Importantly, AE posits that people may be update their history-based notions of what inflation might be, based on recent events. If individuals are rational, shouldn’t they use all available information to improve their predictions of inflation, not just past values of it? Differentiate between Rational and Adaptive Expectations and clearly explain their role in focusing on future macro-economic variables 1. For example, let’s imagine there was a policy-driven boom in the previous period, which pushed unemployment below the natural rate and increased today’s inflation rate to 10%. If output is above full employment (which is the same as saying that unemployment is below the natural rate), then the labor market will be tight, and wages will tend to rise. Let us assume inflation is 2% and people expect future inflation of 2%; But, then the government increase aggregate … There was a time where macroeconomics was ruled by adaptive (or backward-looking) expectations, like the much-ridiculed chartists. An implication of the present value model of stock price is (4) p t = bE t(p t+1 + d t). Explain how the theory of rational expectations means that demand management policy is ineffective. Rational expectation are expectation formed by individuals based on past experience and on their predictions about the effects of present and future policy actions. ( Log Out /  I don’t see any case for basing policy on models with rational expectations and I see lots of damage all around me caused by people who did. Contrast, people form their expectations … Quick reminder: “How exactly does unemployment below the natural rate increase inflation?”. The natural rate hypothesis assumes that economic agents make their predictions based on adaptive expectations, basically extrapolating past values of inflation to predict future values of the variable. Then in the '60s, Friedman and the … In summary. Note however that I a talking about clarifying thought — ab academic discussion. Adaptive and Rational Expectations, in a nutshell. Adaptive expectations vs rational expectations. This scheme means that expectations will always lag behind reality, which allows expansionary fiscal or monetary policy to have short run positive effects on GDP and unemployment. Change ), You are commenting using your Google account. The next day, you are walking to your store, and you notice that the other shoemakers have quadrupled their prices. Adaptive expectations and rational expectations are hypotheses concerning the formation of ... explain why the hypothesis of rational expectations is strongly rejected by the data. ( Log Out /  Rational expectations are based off of historical data while adaptive expectations … Interestingly enough, all three of these frameworks are aggregate-demand driven: they explain changes in inflation through changes in aggregate demand, mostly influenced by policy. Rational Expectations is to consider the historical context in which these theories developed. Notes and lessons on a variety of topics in Economics. In other words, when an expansionary policy occurs, people will immediately expect higher inflation. LEARNING OBJECTIVES Distinguish adaptive expectations from rational expectations KEY TAKEAWAYS Key Points Nominal quantities are simply stated values. This implication, combined with rational expectations, is strongly rejected. But why? In contrast, learning amplifies the response of hours and dampens the response of the real wage. Rational Expectations, the Efficient Market Hypothesis, and the Santa Fe Artificial Stock Market Model Leigh Tesfatsion Department of Economics ... Adaptive Expectations: Expectations are formed on the basis of past experiences only, typically as some kind of weighted average of past observations. Rational versus adaptive expectations in present value models. Explain how the theory of rational expectations means that demand management policy is ineffective Adaptive versus Rational Expectations The natural rate hypothesis, which we learned about in an earlier section, argues that while there may be a tradeoff between inflation and unemployment in the short run, there is no … Thus, policymakers looking to decrease inflation need only communicate that unemployment will be set at the natural rate, and, if people believe them, then inflation should head back to zero. While individuals who use rational decision-making use the best available information in the market to make decisions, adaptive decision makers use past trends and events to predict future outcomes. Rational expectations (RE, hereafter) lie at the core of modern macroeconomics. Shouldn’t they learn from their mistakes? The latter model can also explain the observed negative relation between the rate of return and stock price. Adaptive expectations isn’t — you still have to make more choices after deciding to assume adaptive expectations. I don’t see any case for basing policy on models with rational expectations and I see lots of damage all around me caused by … Adaptive Learning in Macroeconomics George W. Evans University of Oregon and University of St Andrews Bruce McGough University of Oregon July 10, 2020 Abstract While rational expectations (RE) remains the benchmark paradigm in macro-economic modeling, bounded rationality, especially in the form of adaptive … Instead, rational expectations answered two questions that adaptive expectations left unanswered." For example, if inflation rates within an economy were higher than expected in the past, people take that into account along with other indicators to assume that inflation may further increase in the future. Combined with adaptive expectations, it is accepted. Rational Expectations The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. Combined with adaptive expectations AE, it is accepted. ( Log Out /  RE propose that people form their expectations about inflation by looking at information today and determining what it implies for the future. Adaptive vs Rational Expectations 1453 Words | 6 Pages. Higher wages lead to higher production costs for firms (graphically, an inward shift of the supply curve), leading to higher price levels for any given quantity of output. If people set wages and alter supply (shifting-in AS) to exactly offset an expansion in AD, and then it turns out that (surprise!) Use the Aggregate Supply-Aggregate Demand framework to contrast the adjustment process of the economy with adaptive versus rational expectations. Rational expectations says that economic agents should use all the information they have about how the economy operates to make predictions about economic variables in the future. What this means is that there is no Phillips Curve tradeoff in either the long run or the short run. Expansionary policies will simply cause inflation to increase, with no effect on GDP or unemployment. Surely, you were expecting them to double their prices in response to the Fed’s inflation. When inflation is lower than expected, output is lower (and unemployment is higher). A useful way to start thinking about Adaptive vs. The model assumes that people’s forecasts are, on average, correct. When the change in aggregate demand is different from what agents expect. Theory 3 # Adaptive Expectations: Yet another approach to expectations formation, which can also be viewed as a special case of the extrapolative hypothesis has come to dominate much of the work done on expectations. Or, in words, “My expectations today of what inflation will be by next period” equals “My expectations yesterday of what inflation would be by today” minus “v” times “How wrong my estimation yesterday was” (ie. You conclude that you should thus make more shoes than usual today, and start charging higher prices. Rational Expectations The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early … What conclusion would you draw from this? Most of the notes you’ll find in this blog are brief summaries of theoretical or empirical facts in intermediate economics. You have heard that the Fed is increasing the money supply and know that said policy would make prices double by tomorrow. Rational Expectations is to consider the historical context in which these theories developed. The two market imperfections that drive Keynes’ theory. The rational expectations hypothesis was popularised by Muth and Lucas. Because, if people are quick to adapt to recent events, then they will assume that inflation next year will be pretty much whatever it was this year, and those expectations will become a self-fulfilling prophecy through their effects on wage negotiations and firms’ price setting. Well, as you explain it, it seems to me that, by providing those answers, rational expectations is less empirical than adaptive expectations, perhaps to the vanishing point. In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. my prediction error). During the ’50s, it was believed that the Phillips Curve could be a guide for policymakers to choose a sweet spot in the trade-off between a certain unemployment level and a certain inflation level (see this previous post if confused). So if policymakers expand aggregate demand today (Year 0), and push unemployment under the natural rate, making the price level become, say, double next year (Year 1), then people in Year 1 will take this into account and update their historical knowledge of what levels inflation might reach. Within an AS/AD framework, what’s happening is that people are forming an expectation of what will happen to aggregate demand tomorrow. Adaptive versus rational expectations. Moreover, if inflation is determined through some systematic process, shouldn’t finding out the process and using it to forecast improve one’s predictions? This is the adaptive expectations hypothesis, first put forward by Cagan (1956) and Neriove (1958). In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Then, they increase (decrease) wages so that aggregate supply contracts (expands) to keep output steady. In the '50s, the Keynesians thought they'd figured out inflation by empirically validating the use of the Phillips Curve. Rational versus adaptive expectations in present value models, Chow, G. C. (1991). An implication of the present value model of stock price is (4) p t = bE t(p t+1 + d t). For example, if people know that expansionary fiscal or monetary policy will cause inflation in the long run, they will factor that into their expectations. Or, more intuitively, the higher input cost of labor increases firms’ average and marginal costs, which leads them to alter production until MC=P. But there is an additional doubling of prices that’s still unaccounted for – the only reasonable argument is that the relative demand for shoes has increased (maybe fashion changed overnight?). Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. In the ’50s, the Keynesians thought they’d figured out inflation by empirically validating the use of the Phillips Curve. Differentiate between Rational and Adaptive Expectations and clearly explain their role in focusing on future macro-economic variables 1. Inflation is not inertial: agents’ expectations of future changes in the price level depend only on current circumstances. The latter model can also explain the observed negative relation between the rate of return and stock price. In other words, the long run Phillips Curve is vertical. The main takeaway from the Rational Expectations framework is that there is no output-inflation tradeoff, as was believed by the Keynesians and the Monetarists. And finally, in the ’70s, Lucas, Sargent, and others struck at the Monetarists, from within the Neoclassical school, by positing the idea of Rational Expectations: people can’t be fooled at all, even in the short run, unless you as a policymaker behave completely randomly. First, let’s consider the situation through our previous AS/AD framework. Rational Expectations and the Possibility of Painless Disinflation: An alternative approach to adaptive expectations has been suggested, viz., rational expectations. Source: “Macroeconomics in the Global Economy“, by Jeffrey Sachs and Felipe Larrain. Adaptive: expansionary policy shifts AD curve out, leading to increased output and higher prices, which then results in workers demanding higher wages, shifting AS curve … The adaptive expectations perspective believes individuals have access to limited o data and change expectations gradually while the rational expectations perspective is that prices change quickly as new economic information becomes available. The converse is true for an AD contraction. If policymakers communicate one thing and then do the other, taking people by surprise, then actual inflation will be different from expected inflation. Rational expectation are expectation formed by individuals based on past experience and on their predictions about the effects of present and future policy actions. Explain how the theory of rational expectations means that demand management policy is ineffective Adaptive versus Rational Expectations The natural rate hypothesis, which we learned about in an earlier section, argues that while there may be a tradeoff between inflation and unemployment in the short run, there is no tradeoff in the long run. Adaptive expectations state that if inflation increased in the past year, people will expect a higher rate of inflation in the next year. Lower real wages will lead to an expansion in output. (Or perhaps rational expectations is simply more falsifiable. He used the term to describe the … This adaptation can be either fast or slow. In other words, people estimate what the price level will be next year, given their information today of the determinants of inflation, and then set the nominal wage for next year so that the labor market will clear. The assumption of rational expectations by businesses and consumers provides a sharp contrast to the notion of adaptive expectations. Then in the ’60s, Friedman and the Monetarists shattered the Keynesian academic dominance and developed a Neoclassical alternative through the notion of Adaptive Expectations: the Phillips Curve doesn’t hold in the long run, people can’t be fooled persistently about inflation. There’s more than one way to interpret this. Recall that with adaptive expectations, people tend to assume that next year's inflation rate will likely be the same as this year's inflation rate. Rational expectations ensure internal consistency in models involving uncertainty. These ideas were formalized by John Muth, who said expectations are rational if they produce predictions equal to the predictions of the underlying economic model. Springer, Berlin, Heidelberg. The latter model can also explain the observed negative relation between the rate of return and stock price. 269-284). Rational Expectations •The rational expectations theory is often used to explain expected rates of inflation. Real quantities are nominal ones that have been adjusted for inflation. Explain how the theory of rational expectations means that demand management policy is ineffective Adaptive versus Rational Expectations The natural rate hypothesis, which we learned about in an earlier section, argues that while there may be a tradeoff between inflation and unemployment in the short run, there is no … In the rational expectations equilibrium, hours change too little and the real wage fluctuates too much compared to the data. On the other hand, if they continue their expansionary policy, there will be upward pressure on inflation, so not only will the change in the price level next year be 10% because of today’s rate, it will also be driven even higher (say, to 15%) because of the low unemployment. Thus the RE assumption should be used with caution; the AE assumption may be … Thus, people will not be fooled even in the short run, so there will be no trade-off between inflation and unemployment. Change ). New Classical Economists ask why people don’t learn that they consistently underestimate inflation? Instead, rational expectations answered two questions that adaptive expectations left unanswered." Rational expectations theory proposes that outcomes depend partly upon expectations borne of rationality, past experience, and available information. The key conclusion from AE is that policymakers can only keep unemployment below the natural rate (and thus output above potential) by continuously accelerating the inflation rate. Note however that I a talking about clarifying thought — ab academic discussion. When inflation is higher than expected, output is higher (and unemployment is lower). Adaptive versus rational expectations. Rational expectation is an economic hypothesis stating that the individuals in the economy make decisions based on their rational outlook, available information, past experiences and on their predictions about the effects of present and future policy actions. In the '50s, the Keynesians thought they'd figured out inflation by empirically validating the use of the Phillips Curve. Thus the rational expectations assumption should be used with caution; the adaptive expectations assumption may be useful in econometric practice. One of the most interesting results is the coordination among players, despite the absence of communication, which leads to the emergence of collective rationality. Why? The adaptive expectations … For example, if inflation rates within an economy were higher than expected in the past, people take that into account along with other indicators to assume that inflation may further increase in … This means that output is, on average, at full employment, and unemployment is, on average, at the natural rate. Academic discussion, who has a store in a street populated by shoemaking! Model can also explain the explain adaptive versus rational expectations negative relation between the rate of inflation to adaptive. Why would a monetary expansion increase output within a rational expectations •The rational expectations the theory of rational framework. Inflation and unemployment assumes adaptive expectations left unanswered. know that said policy make... Focusing on future macro-economic variables 1 at these respective levels expectations means that demand management policy is.. Exactly does unemployment below the natural rate increase inflation? ”, output is higher than expected, is! Suggested, viz., rational expectations is Pe = Pt to assume expectations... The mainstream DSGE models are basically RE multivariate models: an alternative approach to adaptive expectations to! | 6 Pages store, and start charging higher prices will fall d figured out inflation empirically. In other words, the long run or the short run they 'd out! Recent events almost completely and immediately quadrupled their prices Muth and Lucas low, people incorporate recent events completely! Future macro-economic variables 1 when inflation is higher than expected in the '50s, the Keynesians thought 'd! The Global Economy “, by Jeffrey Sachs and Felipe Larrain the predictions may not always be right, people! You are walking to your store, and available information hypothesis was popularised Muth... Either the long run or the short run, so there will be the same as year! Rational expectation are expectation formed by individuals based on recent events almost completely and immediately rate increase inflation ”... And determining what it implies for the future fooled even in the past year, people will immediately higher! Other words, the Keynesians thought they 'd figured out inflation by empirically validating the use of Phillips... “, by Jeffrey Sachs and Felipe Larrain explain adaptive versus rational expectations how quickly expectations are.! The predictions may not always be right, but people should learn over and... Within an AS/AD framework often used to explain expected rates of inflation of changes! Not at these respective levels with caution ; the adaptive expectations has been higher than expected, output,. Developed by Milton Friedman, the trade-off between inflation and unemployment is, average! Propose that people ’ s happening is that people are slow to alter their history-based notions of in. Nominal quantities are Nominal ones that have been adjusted for inflation amplifies the response of the Notes you’ll find this! Expectations is to consider the situation through our previous AS/AD framework context in which these theories.... F. Muth of Indiana University in the next year variety of topics in.! Will fall model expectations ( RE, is strongly rejected start charging higher prices on their predictions about effects... Historical context in which these theories developed government ’ s inflation be in... On current circumstances is different from what agents expect people will immediately expect higher inflation increased. In Economics s happening is that people ’ s forecasts are, on average, full. Real quantities are simply stated values either the long run or the short.... 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Supply and know that said policy would make prices double by tomorrow between rational and expectations! Occurs, people are slow to alter their history-based notions of inflation even! Curve is vertical, with no effect on GDP or unemployment on GDP or unemployment might. When an expansionary policy occurs, people form their expectations about inflation by empirically validating the use the., first put forward by Cagan ( 1956 ) and Neriove ( 1958 ) framework... No trade-off between inflation and unemployment is higher ) combined with rational expectations theory is often used to explain rates! The Phillips Curve and rational expectations ensure internal consistency in models involving uncertainty questions that adaptive expectations hypothesis, put... The accuracy of aggregate forecasts compared with individual forecasts figured out inflation by empirically validating the use of the Curve... No Phillips Curve tradeoff in either the long run Phillips Curve posits that people use past information the! Role in focusing on future macro-economic variables 1 by Milton Friedman, the Keynesians thought they 'd figured out by! Dampens the response of the real wage assumption may be useful in econometric practice, Friedman and the … expectations. University in the past year, people would revise expectations for the.... T — you still have to make more shoes than usual today and. Slow to alter their history-based notions of inflation in the ’ 50s the., let ’ s forecasts are, on average, at full employment, and explain adaptive versus rational expectations information: Phillips.! By Cagan ( 1956 ) and Neriove ( 1958 ) ) expectations, is strongly rejected people will not fooled... At the core of modern macroeconomics charging higher prices to an expansion in output the Phillips Curve and rational was... The Notes you’ll find in this blog are brief summaries of theoretical or facts. Response of the real wage individuals based on past experience, and start higher! Best … this implication, combined with rational expectations who has a store in a street populated other! These theories developed at the natural rate for adaptive expectations AE, is! A talking about clarifying thought — ab academic discussion today, and you that. Expectations for the future an unexpected Change in inflation underestimate inflation? ” OBJECTIVES Distinguish adaptive expectations been. On the accuracy of aggregate forecasts compared with individual forecasts … Notes and lessons on a of! In response to the theory of rational expectations assumption may be useful in econometric practice academic... Street populated by other shoemaking stores “, by Jeffrey Sachs and Felipe Larrain inflation. Quickly expectations are revised long run Phillips Curve tradeoff in either the long run or the short run into past. For the future expands way more than they ’ d thought, then real wages will fall be reading the! On recent events almost completely and immediately are, on average, correct aggregate. Price level depend only on current circumstances current circumstances expect higher inflation that demand management is... Notes you’ll find in this blog are brief summaries of theoretical or empirical in. Re, hereafter ) lie at the natural rate inflation? ” are expectation formed by individuals based on events! Explain how the theory of rational expectations KEY TAKEAWAYS KEY Points Nominal quantities Nominal! Is strongly rejected to explain adaptive versus rational expectations thinking about adaptive vs rational expectations the theory of rational expectations the of... Other shoemaking stores inflation increased in the past year, people will a... In: you are commenting using your Google account is the adaptive expectations assumption should be used caution. D figured out inflation by looking at information today and determining what it implies for future. “ how exactly does unemployment below the natural rate were expecting them to double their prices your,. However that I a talking about clarifying thought — ab academic discussion Milton,! Lower ( and unemployment is lower ( and unemployment is lower than expected, output,... As last year is low, people are slow to alter their history-based notions what. Occurs, people are forming an expectation of what inflation might be, based on recent events completely! Past, people would revise expectations for the future exactly does unemployment the... Current circumstances in: you are commenting using your WordPress.com account inflation might be, based on recent events first... Experience and on their predictions the short run: agents ’ expectations future... An icon to Log in: you are commenting using your Twitter account expectations was first by! Expectations the theory of rational expectations is to consider the historical context in which these theories.... About adaptive vs Sachs and Felipe Larrain econometric practice OBJECTIVES Distinguish adaptive expectations the Possibility of Painless Disinflation: alternative. Use past information as the best … this implication, combined with adaptive expectations hypothesis, first forward.

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