The [un]importance of forward-looking behavior in price specifications
AbstractThe seminal work of Phelps, Taylor, and Calvo developed forward-looking models of price determination that imparted inertia to the price level. These models incorporate expectations of future prices and excess demand by imposing constraints (typically lag-lead symmetry constraints) that force future variables to enter the specification. In this paper, I test the empirical significance of future prices in specifications like those of Taylor. I find that expectations of future prices are empirically unimportant in explaining price and inflation behavior. However, the dynamics of a model that includes a purely backward-looking inflation specification differ significantly-and not altogether pleasingly-from those with a forward-looking specification.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Boston in its series Working Papers with number 95-6.
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Money, Credit and Banking 29, no. 3 (August 1997): 338-50.
Other versions of this item:
- Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
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