Expectationsaugmented

Expectationsaugmented refers to a class of economic models that explicitly incorporate agents’ expectations into the determination of current and future outcomes. In these models, decisions by households, firms, and policymakers respond not only to present conditions but also to what people expect will occur in the future.

A well-known instance is the expectationsaugmented Phillips curve, which links inflation to expected inflation and to real activity. In a simplified form, inflation in period t is modeled as the sum of expected inflation and a term reflecting the output gap plus any supply shocks. This approach helps explain why the traditional short-run trade-off between inflation and unemployment can weaken once expectations adjust, and why the long-run relationship may be different from the short-run one.

Origins and scope: The approach emerged in mid-20th century macroeconomics, with Milton Friedman and later scholars arguing that anticipated policy actions influence inflation but do not permanently cure unemployment. The framework allows different expectations formation mechanisms—notably adaptive and rational expectations—to be embedded within models, affecting both results and policy implications.

Implications and limitations: By making expectations a central determinant, expectationsaugmented models emphasize the importance of credibility and forward guidance for policy. They also face empirical challenges, since expectations are not directly observed and must be inferred or specified within a given modeling approach; results can therefore depend on the chosen mechanism for forming expectations.

See also: Phillips curve, rational expectations, adaptive expectations, monetary policy credibility, macroeconomic models.