Working Paper

The role of expectations in U. S. inflation dynamics

Abstract: A growing body of literature examines alternatives to the rational expectations hypothesis in applied macroeconomics. This paper continues this strand of research by examining the role survey expectations play in the inflation process and reports three principal findings. One, short-run inflation expectations appear to play a significant role in explaining U.S. inflation over the past 20?25 years. Two, long-run expectations generally do not appear to have a direct influence on U.S. inflation over the same period, although these longer expectations enter indirectly as a key determinant of the short-run expectations. The restrictions implied by \"trend inflation\" models of inflation are generally rejected in the data. Three, by employing a \"survey operator,\" this paper develops a first pass at a structural model that incorporates the features discussed above and assesses its performance in explaining inflation in the postwar period.

Keywords: Inflation (Finance); Rational expectations (Economic theory);

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2011

Number: 11-11