Does the Expectations Trap Render the Natural-Rate Model Invalid in the Disinflationary Zone?
This paper questions the validity of the natural-rate expectations augmented Phillips curve (N-REAP) model by examining the concept of an 'expectations trap.' If a Phillips curve becomes horizontal at higher levels of unemployment--as it did in the curves derived from a century of data by A. W. H. Phillips and R. G. Lipsey--then policy-induced increases in unemployment can reduce neither inflation nor inflationary expectations. The expectations trap, therefore, tends to render the policy conclusions derived from the N-REAP model either invalid or intolerably slow in the disinflation region. Copyright 1997 by Oxford University Press.
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Volume (Year): 21 (1997)
Issue (Month): 1 (January)
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