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Do expectations matter? The Great Moderation revisited

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  • Canova, Fabio
  • Gambetti, Luca

Abstract

We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7597.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7597

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Keywords: Expectations; Indeterminacy; Term structure; VARs;

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