The Role of Expectations in Inflation Dynamics
by Jeff Fuhrer
Federal Reserve Bank of Boston
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.
(PDF, 29 pages 681 kb)
Discussion by James H. Stock