<p>In the Adaptive Philips Curve, $E(\pi_t|I_{t-1})=\pi_{t-1}$. 
I'm reading a macro book, and the authors state that there is no long-term trade-off, i.e., when making the economy run at a level other than the equilibrium level of output, the policy makers must allow for inflation growth in the same direction, meaning $sign(\Delta \pi_t)=sign(y_t-y_e)$.</p>

<p>However, the way they write in the book is as if some sort of trade-off could still be allowed by this adaptive Philips Curve, if not in the long-run, then at short/medium-run. How could this possible?</p>

<p>Also, in the Rational Expectations Phillips Curve, we have $E(\pi_t|I_{t-1})=\pi_{t}$. How can we deduce this equality just by using $\pi_{t}=E(\pi_t|I_{t-1})+\alpha(y_t-y_e)+\epsilon_t$, where $\epsilon_t$ is the error/shock term, and $E(\epsilon_t|I_{t-1})=0$?</p>

<p>Any help would be appreciated.</p>

CC BY-SA 3.0
2015-11-26T13:44:06.340Z
The assumption $E(\pi_t|I_{t-1})=\pi_{t}$ is the "perfect foresight" assumption. Too strong and only for educational purposes, in my opinion.
Alecos Papadopoulos
CC BY-SA 3.0
2015-11-26T15:40:44.563Z
@AlecosPapadopoulos Yes, I agree with you. The manual I'm reading now is called 'Macroeconomics: Institutions, Instability, and Financial System'. Have you ever heard of it? or read it?
An old man in the sea.
CC BY-SA 3.0
2015-11-26T15:54:23.967Z
No, I have no opinion on it. But I will have to read it in any case, since it is too close to what preoccupies me.
Alecos Papadopoulos
<macroeconomics><inflation>
Inflation - Output Trade-off in the Adaptive and Rational Expectations Philips Curve
An old man in the sea.
# Inflation - Output Trade-off in the Adaptive and Rational Expectations Philips Curve

(Asked by: username_0 on 2015-11-25)

In the Adaptive Philips Curve, $E(\pi\_t|I\_{t-1})=\pi\_{t-1}$.
I'm reading a macro book, and the authors state that there is no long-term trade-off, i.e., when making the economy run at a level other than the equilibrium level of output, the policy makers must allow for inflation growth in the same direction, meaning $sign(\Delta \pi\_t)=sign(y\_t-y\_e)$.

However, the way they write in the book is as if some sort of trade-off could still be allowed by this adaptive Philips Curve, if not in the long-run, then at short/medium-run. How could this possible?

Also, in the Rational Expectations Phillips Curve, we have $E(\pi\_t|I\_{t-1})=\pi\_{t}$. How can we deduce this equality just by using $\pi\_{t}=E(\pi\_t|I\_{t-1})+\alpha(y\_t-y\_e)+\epsilon\_t$, where $\epsilon\_t$ is the error/shock term, and $E(\epsilon\_t|I\_{t-1})=0$?

Any help would be appreciated.

**Tags:** macroeconomics, inflation

> **Comments:**
> **username_1**: The assumption $E(\pi_t|I_{t-1})=\pi_{t}$ is the "perfect foresight" assumption. Too strong and only for educational purposes, in my opinion.  
> **username_0**: @AlecosPapadopoulos Yes, I agree with you. The manual I'm reading now is called 'Macroeconomics: Institutions, Instability, and Financial System'. Have you ever heard of it? or read it?  
> **username_1**: No, I have no opinion on it. But I will have to read it in any case, since it is too close to what preoccupies me.  

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## 0 answers

