Origins
Cagan (1956) modelled hyperinflation with expectations formed from weighted past inflation, and Nerlove (1958) applied the idea to cobweb cycles.
The natural rate
Friedman (1968) added adaptive expectations to the Phillips curve, arguing unemployment returns to the natural rate once expectations adjust, a core argument of monetarism.
Critique and later work
Muth (1961) and Lucas (1972) rejected systematic errors and proposed rational expectations. Evans and Honkapohja (2001) developed learning models, Coibion and Gorodnichenko (2015) found sluggish survey expectations and Malmendier and Nagel (2016) showed experience shapes beliefs.
FAQ
- What are adaptive expectations in simple terms?
- Forecasting the future by adjusting a little for how wrong your last forecast was.
- How do they differ from rational expectations?
- Adaptive expectations use only past data and adjust slowly; rational expectations use all available information and avoid systematic errors.
Sources reviewed: 2026-10-26
References
- Cagan, P. (1956). The monetary dynamics of hyperinflation. In M. Friedman (Ed.), Studies in the quantity theory of money (pp. 25–117). University of Chicago Press. Classic use in hyperinflation analysis.
- Nerlove, M. (1958). Adaptive expectations and cobweb phenomena. Quarterly Journal of Economics, 72(2), 227–240. Applies the idea to cobweb cycles.
- Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17. Expectations-augmented Phillips curve.
- Muth, J. F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315–335. Proposes rational expectations as an alternative.
- Lucas, R. E., Jr. (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103–124. Leads the rational expectations revolution.
- Evans, G. W., & Honkapohja, S. (2001). Learning and expectations in macroeconomics. Princeton University Press. Adaptive learning as a middle ground.
- Coibion, O., & Gorodnichenko, Y. (2015). Information rigidity and the expectations formation process: A simple framework and new facts. American Economic Review, 105(8), 2644–2678. Survey evidence of sluggish expectations.
- Malmendier, U., & Nagel, S. (2016). Learning from inflation experiences. Quarterly Journal of Economics, 131(1), 53–87. Personal experience shapes expectations.