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Near-rationality and inflation in two monetary regimes

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  • Laurence Ball

Abstract

Sticky-price models with rational expectations fail to capture the inertia in US inflation Models with backward-looking expectations capture current inflation behavior but are unlikely to fit other monetary regimes This paper seeks to overcome these problems with a near-rational model of expectations In the model agents make univariate forecasts of inflation: they use information on past inflation optimally but they ignore other variables The paper tests sticky-price models with near-rational expectations for two periods in US history the post-1960 period of persistent inflation and the period from 1879 to 1914 when inflation was not persistent The models fit the data for both periods; in contrast both rational-expectations and backward-looking models fail for at least one period
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Suggested Citation

  • Laurence Ball, 2000. "Near-rationality and inflation in two monetary regimes," Proceedings, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpr:y:2000:x:4
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Inflation (Finance);

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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