Evolution of expectations models in economic thought

Abstract

Inflation expectations have been of prime interest for policymakers and researchers for decades. In 2023, when high inflation is one of the biggest challenges facing the world, economists must give them due weight. This article provides a systematic chronological treatment of the main approaches to expectations formation modelling in macroeconomics. While a number of surveys with focus on separate models are available, a full treatise (as per the author’s research) has been missing. This paper aims to fill the gaps. However, despite being exhaustive, it does not pretend to be coping with all contributions ever developed. The author has tried to present the topic in a way that is accessible and useful both to graduate students who encounter the subject for the first time and practitioners with previous knowledge who need a systematic treatment of the subject. The article starts with a general overview what are expectations and, in particular, inflation expectations, and why do they matter. This is followed by a chronological presentation of the main expectations models and a discussion of the prerequisites to appear, their implications and significance to economic thought, as well as, criticism. Finally, the author offers some perspectives and conclusions on the subject.