January 2012 special supplemental issue contents
The Role of Expectations inInflation 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.

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