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The expectations trap hypothesis

  • Lawrence J. Christiano
  • Christopher Gust

This article explores a hypothesis about the take-off in inflation in the early 1970s. According to the expectations trap hypothesis, the Fed was driven to high money growth by a fear of violating the expectations of high inflation that existed at the time. The authors argue that this hypothesis is more compelling than the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by product of a conscious decision to jump start a weak economy.

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Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2000)
Issue (Month): Q II ()
Pages: 21-39

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Handle: RePEc:fip:fedhep:y:2000:i:qii:p:21-39:n:v.25no.2
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  1. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  2. Athanasios Orphanides & Simon Van_Norden, 2000. "The Reliability of Output Gap Estimates in Real Time," Econometric Society World Congress 2000 Contributed Papers 0768, Econometric Society.
  3. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectations, traps and discretion," Working Papers in Applied Economic Theory 96-04, Federal Reserve Bank of San Francisco.
  4. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  5. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Modeling Money," NBER Working Papers 6371, National Bureau of Economic Research, Inc.
  7. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  8. John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," CRSP working papers 479, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Susanto Basu & John Fernald, 2001. "Why Is Productivity Procyclical? Why Do We Care?," NBER Chapters, in: New Developments in Productivity Analysis, pages 225-302 National Bureau of Economic Research, Inc.
  10. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  11. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  12. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the Fiscal Theory of the Price Level," NBER Working Papers 7668, National Bureau of Economic Research, Inc.
  13. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  14. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers 96-28, C.V. Starr Center for Applied Economics, New York University.
  15. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1, December.
  16. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  17. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  18. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
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