The (Un)Importance of Forward-Looking Behavior in Price Specifications
The seminal work of Edmund S. Phelps (1978), John B. Taylor (1980), and Guillermo A. Calvo (1983) developed forward-looking models of price determination that imparted inertia to the price level. These models incorporate expectations of future prices and excess demand by imposing constraints (typically lag-lead symmetry constraints) that force future variables to enter the specification. In this paper, the author tests the empirical significance of future prices in specifications like those of Taylor. He finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior. However, the dynamics of a model that includes a purely backward-looking inflation specification differ substantially--and not altogether pleasingly--from those with a forward-looking specification. Copyright 1997 by Ohio State University Press.
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Volume (Year): 29 (1997)
Issue (Month): 3 (August)
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- Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 114(4), pages 783-809, December.
- Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
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- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- Guy M Meredith & Bankim Chadha & Paul R Masson, 1991.
"Models of Inflation and the Costs of Disinflation,"
IMF Working Papers
91/97, International Monetary Fund.
- Laurence Ball, 1993.
"What Determines the Sacrifice Ratio?,"
NBER Working Papers
4306, National Bureau of Economic Research, Inc.
- Brayton, Flint & Mauskopf, Eileen, 1985. "The federal reserve board MPS quarterly econometric model of the US economy," Economic Modelling, Elsevier, vol. 2(3), pages 170-292, July.
- Fuhrer, Jeff & Moore, George, 1992.
"Monetary policy rules and the indicator properties of asset prices,"
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Elsevier, vol. 29(2), pages 303-336, April.
- Jeffrey C. Fuhrer & George R. Moore, 1989. "Monetary policy rules and the indicator properties of asset prices," Finance and Economics Discussion Series 89, Board of Governors of the Federal Reserve System (U.S.).
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