Resource title

Inflation Expectations, the Phillips Curve and Monetary Policy

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Resource description

Conjectures about inflation expectations are inextricably linked to our understanding of the relationship between the real and monetary sides of the economy; yet, direct empirical research on the matter has been scarce at best. This paper therefore examines the empirical properties of inflation expectations data constructed on the basis of both qualitative and quantitative surveys of consumers for a set of eight European countries. The rational perceptions hypothesis is tested and rejected by the data, a finding which in turn leads us to reject the rational expectations hypothesis and casts doubt on the New Keynesian Phillips Curve model. The popular alternative of using ?rule-of-thumb? expectations in such models empirically is also found to be unrobust. Similarly, the conjecture by Akerlof et al. (2000) of a non-vertical long-run Phillips curve arising from the presence of ?near-rational? expectations cannot be supported. The Mankiw and Reis (2002) Phillips curve based on the idea of ?sticky information? succeeds in its intuition of a gradual adjustment of expectations, but its assumption of rational updating is challenged by the data in the context of the natural experiment provided by the UK's ERM disinflation. Instead, the adjustment mechanism for expectations appears to display largely adaptive characteristics. Finally, the paper provides some insights into the nature of the interaction between monetary policy and inflation expectations.

Resource author

Fabien Curto Millet

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Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/17855

Resource license

Adapt according to the presented license agreement and reference the original author.