The Formation of Expectations, Inflation, and the Phillips Curve

Olivier Coibion, Yuriy Gorodnichenko and Rupal Kamdar

Journal of Economic Literature, 2018, vol. 56, issue 4, 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.

JEL-codes: D84 E24 E27 E31 E37 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/jel.20171300
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Citations: View citations in EconPapers (198)

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Working Paper: The Formation of Expectations, Inflation and the Phillips Curve (2017)
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