Wouters model

Wouters' model describes how individuals form expectations about future inflation based on past experiences, a process called adaptive expectations. It suggests that people don't instantly adapt to new inflation rates but gradually update their beliefs by giving more weight to recent data while still considering the past. This approach helps explain how inflation expectations influence actual inflation, as people's expectations can impact wage-setting and pricing behaviors, creating a feedback loop. The model emphasizes the importance of historical inflation patterns in shaping economic decisions, providing a framework for understanding inflation dynamics over time.