The Formation of Expectations, Inflation, and the Phillips Curve

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 surve...

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Bibliographic Details
Published in:Journal of economic literature 2018-12, Vol.56 (4), p.1447-1491
Main Authors: Coibion, Olivier, Gorodnichenko, Yuriy, Kamdar, Rupal
Format: Article
Language:English
Subjects:
Economic models
Inflation
Inflation expectations
Macroeconomics
Phillips curve
Polls & surveys
Rational expectations
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Summary: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.
ISSN:0022-0515
2328-8175
DOI:10.1257/jel.20171300