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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References listed on IDEAS
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- Laurence Ball, 1994.
"What Determines the Sacrifice Ratio?,"
in: Monetary Policy, pages 155-193
National Bureau of Economic Research, Inc.
- Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
- Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
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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.
- 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," Journal of Monetary Economics, 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.).
- Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159. Full references (including those not matched with items on IDEAS)
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