IDEAS home Printed from https://ideas.repec.org/a/fip/fedkpr/y1982p47-95.html
   My bibliography  Save this article

The role of expectations in the choice of monetary policy

Author

Listed:
  • John B. Taylor

Abstract

This paper reviews and contrasts different views about the role of expectations in policy research and practice. Recently, two widely different views seem to have dominated the analysis of policy questions.One view, which is referred to as the "new classical macroeconomic"view, is that expectations overwhelm the influence of monetary policy.The other view, which is referred to as the "Keynesian" macroeconomic view, is that expectations are unimportant because people do not adjust to expectations of policy change. The paper argues that both these views are misleading. It advances a new view of the role of expectations that is still emerging from current macroeconomic reearch. The new view recognizes the importance of contractual arrangements which prevent a modern economy from adjusting instantaneously to policy changes, even if they are expected. But it also emphasizes that forward-looking expectations influence how these arrangements are set up and how they evolve over time. Recent criticisms of this new view are reviewed, and examples are given to illustrate how quantitative methods that incorporate this view can be used in practice.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • John B. Taylor, 1982. "The role of expectations in the choice of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 47-95.
    • Handle: RePEc:fip:fedkpr:y:1982:p:47-95
    as

    Download full text from publisher

    File URL: https://www.nber.org/system/files/working_papers/w1044/w1044.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fair, Ray C, 1979. "An Analysis of a Macro-Econometric Model with Rational Expectations in the Bond and Stock Markets," American Economic Review, American Economic Association, vol. 69(4), pages 539-552, September.
    2. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-237, April.
    3. Fellner, William, 1980. "The Valid Core of Rationality Hypotheses in the Theory of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 763-787, November.
    4. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    5. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    6. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
    7. Okun, Arthur M, 1980. "Rational-Expectations-with-Misperceptions as a Theory of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 817-825, November.
    8. Cukierman, Alex, 1981. "How to Quantify Credibility and Its Effects - A Suggestion," Foerder Institute for Economic Research Working Papers 275331, Tel-Aviv University > Foerder Institute for Economic Research.
    9. Blinder, Alan S. & Fischer, Stanley, 1981. "Inventories, rational expectations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 277-304.
    10. Walsh, Carl E, 1984. "Interest Rate Volatility and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 133-150, May.
    11. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
    12. Tobin, James, 1981. "The Monetarist Counter-Revolution Today-An Appraisal," Economic Journal, Royal Economic Society, vol. 91(361), pages 29-42, March.
    13. Hicks, John R, 1969. "Automatists, Hawtreyans, and Keynesians," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(3), pages 307-317, August.
    14. Rudiger Dornbusch, 1981. "Exchange Rate Rules and Macroeconomic Stability," Palgrave Macmillan Books, in: John Williamson (ed.), Exchange Rate Rules, chapter 3, pages 55-67, Palgrave Macmillan.
    15. Robert J. Barro & Mark Rush, 1980. "Unanticipated Money and Economic Activity," NBER Chapters, in: Rational Expectations and Economic Policy, pages 23-73, National Bureau of Economic Research, Inc.
    16. Robert E. Hall, 1980. "Employment Fluctuations and Wage Rigidity," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 91-142.
    17. Blinder, Alan S, 1981. "Monetary Accommodation of Supply Shocks under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 425-438, November.
    18. Hercowitz, Zvi, 1982. "Money and price dispersion in the united states," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 25-37, July.
    19. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    20. Marcus Miller, 1981. "The medium term financial strategy: an experiment in co-ordinating monetary and fiscal policy," Fiscal Studies, Institute for Fiscal Studies, vol. 2(2), pages 50-60, July.
    21. Taylor, John B, 1981. "Stabilization, Accommodation, and Monetary Rules," American Economic Review, American Economic Association, vol. 71(2), pages 145-149, May.
    22. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-165, February.
    23. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    24. Mishkin, Frederic S, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 22-51, February.
    25. Garber, Peter M., 1982. "Transition from inflation to price stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 11-42, January.
    26. Boschen, John F. & Grossman, Herschel I., 1982. "Tests of equilibrium macroeconomics using contemporaneous monetary data," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 309-333.
    27. Barro, Robert J. & Hercowitz, Zvi, 1980. "Money stock revisions and unanticipated money growth," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 257-267, April.
    28. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
    29. Orley Ashenfelter & David Card, 1982. "Time Series Representations of Economic Variables and Alternative Models of the Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(5), pages 761-782.
    30. Weiss, Laurence M, 1980. "The Role for Active Monetary Policy in a Rational Expectations Model," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 221-233, April.
    31. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    32. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
    33. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    34. Stanley Fischer, 1980. "Rational Expectations and Economic Policy," NBER Books, National Bureau of Economic Research, Inc, number fisc80-1.
    35. Christofides, L. N. & Wilton, D. A., 1983. "The determinants of contract length : An empirical analysis based on Canadian micro data," Journal of Monetary Economics, Elsevier, vol. 12(2), pages 309-319.
    36. Canzoneri, Matthew B., 1980. "Labor contracts and monetary policy," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 241-255, April.
    37. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
    38. Willem H. Buiter & Ian Jewitt, 1980. "Staggered Wage Setting without Money Illusion: Variations on a Theme of Taylor," NBER Working Papers 0545, National Bureau of Economic Research, Inc.
    39. Begg, David Knox Houston, 1982. "Rational Expectations, Wage Rigidity and Involuntary Unemployment: A Particular Theory," Oxford Economic Papers, Oxford University Press, vol. 34(1), pages 23-47, March.
    40. Mussa, Michael L, 1977. "The Welfare Cost of Inflation and the Role of Money as a Unit of Account," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(2), pages 276-286, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sitikantha Pattanaik & Silu Muduli & Soumyajit Ray, 2020. "Inflation expectations of households: do they influence wage-price dynamics in India?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 13(3), pages 244-263, September.
    2. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    3. William Walter Brown & Gary J. Santoni, 1986. "Rational Optimizing, Monetary Theory, and Welfare," Cato Journal, Cato Journal, Cato Institute, vol. 5(3), pages 949-955, Winter.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charles Freedman, 1982. "The effect of U.S. policies on foreign countries: the case of Canada," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 97-129.
    2. John B. Taylor, 1983. "Rational Expectations Models in Macroeconomics," NBER Working Papers 1224, National Bureau of Economic Research, Inc.
    3. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050, Elsevier.
    4. Zijp, R. van, 1990. "New classical monetary business cycle theory," Serie Research Memoranda 0058, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    5. Bennett T. McCallum, 1982. "Macroeconomics after a decade of rational expectations : some critical issues," Economic Review, Federal Reserve Bank of Richmond, vol. 68(Nov), pages 3-12.
    6. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012, Elsevier.
    7. Grossman, Herschel I., 1983. "The natural-rate hypothesis, the rational-expectations hypothesis, and the remarkable survival of non-market-clearing assumptions," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 225-245, January.
    8. Plassard, Romain, 2021. "Barro, Grossman, and the domination of equilibrium macroeconomics," MPRA Paper 107201, University Library of Munich, Germany.
    9. Romain Plassard, 2019. "From Disequilibrium to Equilibrium Macroeconomics: Barro and Grossman's Trade-off between Rigor and Realism," GREDEG Working Papers 2019-17, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    10. Michael Dotsey & Robert G. King, 1988. "Rational expectations business cycle models: a survey," Economic Review, Federal Reserve Bank of Richmond, vol. 74(Mar), pages 3-15.
    11. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    12. Gauger, Jean Ann, 1984. "Three essays on the neutrality of anticipated money growth," ISU General Staff Papers 198401010800008758, Iowa State University, Department of Economics.
    13. Antoine d'Autume, 1986. "Les anticipations rationnelles dans l'analyse macro-économique," Revue Économique, Programme National Persée, vol. 37(2), pages 243-284.
    14. Kevin D. Hoover & Òscar Jordà, 2001. "Measuring systematic monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 113-144.
    15. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, August.
    16. S. Rao Aiyagari, 1990. "Deflating the case for zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Sum), pages 2-11.
    17. Kevin D. Hoover & Òscar Jordà, 2001. "Measuring systematic monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 83(Jul), pages 113-144.
    18. Paul Oslington, 2012. "General Equilibrium: Theory and Evidence," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 446-448, September.
    19. Robert P. Flood & Robert J. Hodrick, 1986. "Money and the Open Economy Business Cycle: A Flexible Price Model," NBER Working Papers 1967, National Bureau of Economic Research, Inc.
    20. Eden, Benjamin, 1994. "The Adjustment of Prices to Monetary Shocks When Trade Is Uncertain and Sequential," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 493-509, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedkpr:y:1982:p:47-95. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Zach Kastens (email available below). General contact details of provider: https://edirc.repec.org/data/frbkcus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.