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January 2012 issue
List of authors
 
Clarida, Fuhrer
Gerlach, Jordan
Kuttner, Posen
Melino
Fuhrer
Clarida
Hubbard
Fuster, Hebert, Laibson
Bodiel
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The Role of Expectations in Inflation Dynamics

by Jeff Fuhrer
Federal Reserve Bank of Boston

Abstract

rational expectations hypothesis in applied macroeconomics. This paper continues this strand of research, examining the role of survey expectations in the inflation process. It reports three principal findings: (i) short-run inflation expectations appear to have a significant role in explaining U.S. inflation over the past twenty to twenty-five years; (ii) long-run expectations generally do not appear to have a direct influence on U.S. inflation over the same period, although they 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); and (iii) the paper develops a first pass at a structural model that incorporates the features discussed above, employing a “survey operator,” and assesses its performance in explaining inflation in the post-war period.

JEL Codes: E31, E32.

 
Full article (PDF, 29 pages 681 kb)
Discussion by James H. Stock