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The expectations trap hypothesis

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Abstract

The authors examine the inflation take-off of the early 1970s in terms of the expectations trap hypothesis, according to which fear of violating the public?s inflation expectations pushed the Fed into producing high inflation. This interpretation is compared with the Phillips curve hypothesis, according to which the Fed produced high inflation as the unfortunate byproduct of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what should be done to prevent future inflation flare-ups.

Suggested Citation

  • Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," Working Papers (Old Series) 0004, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0004
    DOI: 10.26509/frbc-wp-200004
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    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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