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Do Expectations Matter? The Great Moderation Revisited

Listed author(s):
  • Fabio Canova
  • Luca Gambetti

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. (JEL E23, E24, E31, E32)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.183
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (July)
Pages: 183-205

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:183-205
Note: DOI: 10.1257/mac.2.3.183
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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