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The Formation of Expectations, Inflation and the Phillips Curve

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  • Olivier Coibion
  • Yuriy Gorodnichenko
  • Rupal Kamdar

Abstract

This paper argues for a careful (re)consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses. While the rational expectations revolution has allowed for great leaps in macroeconomic modeling, the surveyed empirical micro-evidence appears increasingly at odds with the full-information rational expectation assumption. We explore models of expectation formation that can potentially explain why and how survey data deviate from full-information rational expectations. Using the New Keynesian Phillips curve as an extensive case study, we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full-information rational expectations.

Suggested Citation

  • Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2017. "The Formation of Expectations, Inflation and the Phillips Curve," NBER Working Papers 23304, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23304
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    References listed on IDEAS

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    Cited by:

    1. N. Gregory Mankiw & Ricardo Reis, 2018. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 81-96, Winter.
    2. Francesca Rondina, 2018. "Estimating Unobservable Inflation Expectations in the New Keynesian Phillips Curve," Econometrics, MDPI, Open Access Journal, vol. 6(1), pages 1-20, February.
    3. Hasenzagl, Thomas & Pellegrino, Filippo & Reichlin, Lucrezia & Ricco, Giovanni, 2017. "A Model of the Fed’s View on Inflation," The Warwick Economics Research Paper Series (TWERPS) 1145, University of Warwick, Department of Economics.
    4. Wagner Piazza Gaglianone, 2017. "Empirical Findings on Inflation Expectations in Brazil: a survey," Working Papers Series 464, Central Bank of Brazil, Research Department.
    5. Ahmed Jamal Pirzada, 2017. "Price Stickiness and Intermediate Materials Prices," Bristol Economics Discussion Papers 17/686, Department of Economics, University of Bristol, UK.
    6. Laura Bartiloro & Marco Bottone & Alfonso Rosolia, 2017. "What does the heterogeneity of the inflation expectations of Italian firms tell us?," Questioni di Economia e Finanza (Occasional Papers) 414, Bank of Italy, Economic Research and International Relations Area.
    7. Luengo-Prado, Maria Jose & Rao, Nikhil & Sheremirov, Viacheslav, 2017. "Sectoral inflation and the Phillips curve: what has changed since the Great Recession?," Current Policy Perspectives 17-5, Federal Reserve Bank of Boston.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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