The Formation of Expectations, Inflation, and the Phillips Curve

Author:

Coibion Olivier1,Gorodnichenko Yuriy2,Kamdar Rupal3

Affiliation:

1. University of Texas at Austin and NBER.

2. University of California, Berkeley and NBER.

3. University of California, Berkeley.

Abstract

This paper argues for a careful (re)consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses. While the rational expectations revolution has allowed for great leaps in macroeconomic modeling, the surveyed empirical microevidence appears increasingly at odds with the full-information rational expectation assumption. We explore models of expectation formation that can potentially explain why and how survey data deviate from full-information rational expectations. Using the New Keynesian Phillips curve as an extensive case study, we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full-information rational expectations. (JEL D04, E24, E27, E31, E37)

Publisher

American Economic Association

Subject

Economics and Econometrics

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