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The Expectations Trap Hypothesis

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  • Lawrence J. Christiano
  • Christopher J. Gust

Abstract

We explore a hypothesis about the take-off in inflation that occurred in the early 1970s. According to the expectations trap hypothesis, the Fed was pushed into producing the high inflation out of a fear of violating the public's inflation expectations. We compare this hypothesis with the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by-product of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what needs to be done to prevent other inflation flare-ups.

Suggested Citation

  • Lawrence J. Christiano & Christopher J. Gust, 2000. "The Expectations Trap Hypothesis," NBER Working Papers 7809, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7809
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    References listed on IDEAS

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    JEL classification:

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

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