New York: National Bureau of Economic Research. The expectations-augmented Phillips curve introduces adaptive expectations into the Phillips curve.These adaptive expectations, which date from Irving Fisher ’s book “The Purchasing Power of Money”, 1911, were introduced into the Phillips curve by monetarists, specially Milton Friedman.Therefore, we could say that the expectations-augmented Phillips curve was first used to … Adaptive expectations and rational expectations are hypotheses concerning the formation of expectations which economists can adopt in the study of economic behavior. inflation) basing solely on its past values. Optimal properties of exponentially weighted forecasts. Rational expectations theory says that people use all available information, past and current, to predict future events. In the area of expectations, this has led to the rational-expectations hypothesis. It is a hypothesized process by which people from their expectations about what will happen in the future based on what has happened in the past. This promoted adaptive expectations hypothesis which became mainstream in the economics of that time. Adaptive expectations are an economic theory which gives importance to past events in predicting future outcomes. Volume 10, No. In the seminal article on rational expectations, Muth (1961) suggested “that expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory”. 1 Evidence and statistical reason for supporting the adaptive expectations hypothesis . Adaptive expectations theory says that people use past information as the best predictor of future events. The focus of this article is the “adaptive expectations hypothesis” of Milton Friedman and his analysis of short-run and long-run Phillips Curve. Adaptive Expectations The adaptive expectations approach dominated work on inflation and macro economics in the early 1960s.The adaptive expectation hypothesis is based on the assumption that the best indicator of the future is what happened in the past. There is virtually no economic model that does not examine how, within a dynamic perspective, the explicit account of individuals’ expectations qualifies the conclusions of the static analysis. The main idea of this hypothesis is that economic agents form their expectation of the future value of some economic variable (e.g. Muth, J.F. Adaptive Expectations. 1960. 4 (Winter 2007) In contemporary economic theory, and especially in macroeconomics, expectations are being given a central place. Another hypothesis the economic agents use when forming their expectations for the future instead of the former adaptive hypothesis is the rational expectation (RE) hypothesis. If inflation was higher than normal in the past, people will expect it to be higher than anticipated in the future. The adaptive expectations hypothesis may be stated most succinctly in the form of the equation: ... Economic forecasts and expectations. In his reasoning, Friedman employed adaptive expectations concept. By this hypothesis economic agents can use all past relevant information about the factors influencing Adaptive Expectations Hypothesis: Definition In business and finance, the adaptive expectations hypothesis is an economic theory that looks at past activity to predict future outcomes. Google Scholar.