Inflation Expectations, the Phillips Curve and Monetary Policy
AbstractConjectures about inflation expectations are inextricably linked to our understanding of the relationship between the real and monetary sides of the economy; yet, direct empirical research on the matter has been scarce at best. This paper therefore examines the empirical properties of inflation expectations data constructed on the basis of both qualitative and quantitative surveys of consumers for a set of eight European countries. The rational perceptions hypothesis is tested and rejected by the data, a finding which in turn leads us to reject the rational expectations hypothesis and casts doubt on the New Keynesian Phillips Curve model. The popular alternative of using “rule-of-thumb” expectations in such models empirically is also found to be unrobust. Similarly, the conjecture by Akerlof et al. (2000) of a non-vertical long-run Phillips curve arising from the presence of “near-rational” expectations cannot be supported. The Mankiw and Reis (2002) Phillips curve based on the idea of “sticky information” succeeds in its intuition of a gradual adjustment of expectations, but its assumption of rational updating is challenged by the data in the context of the natural experiment provided by the UK's ERM disinflation. Instead, the adjustment mechanism for expectations appears to display largely adaptive characteristics. Finally, the paper provides some insights into the nature of the interaction between monetary policy and inflation expectations.
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1339.
Length: 27 pages
Date of creation: Jun 2007
Date of revision:
Inflation expectations; inflation perceptions; survey data; rationality; Phillips curve; consumers; expectations distribution; inflation targeting;
Find related papers by JEL classification:
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-07 (All new papers)
- NEP-CBA-2007-07-07 (Central Banking)
- NEP-EEC-2007-07-07 (European Economics)
- NEP-MAC-2007-07-07 (Macroeconomics)
- NEP-MON-2007-07-07 (Monetary Economics)
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