The Formation of Expectations, Inflation, and the Phillips Curve
Journal of Economic Literature
vol. 56,
no. 4, December 2018
(pp. 1447-91)
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 micro-evidence 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.Citation
Coibion, Olivier, Yuriy Gorodnichenko, and Rupal Kamdar. 2018. "The Formation of Expectations, Inflation, and the Phillips Curve." Journal of Economic Literature, 56 (4): 1447-91. DOI: 10.1257/jel.20171300Additional Materials
JEL Classification
- D84 Expectations; Speculations
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E27 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- E31 Price Level; Inflation; Deflation
- E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications