Testing the Expectations Trap Hypothesis: A Time-Varying Parameter Approach

Naveen Srinivasan

Working Papers from Madras School of Economics,Chennai,India

Abstract: The expectations trap hypothesis is an influential but untested model of monetary policy. The hypothesis conjectures that high inflation during the 1970s was the outcome of a shift in private sector beliefs which were then validated by monetary policy. The subsequent fall in inflation was mainly due to changes in those beliefs. We provide a formal test of the model, using US data from 1948-2008. The flexible least squares approach of Kalaba and Tesfatsion (1988, 1989) is used to evaluate its empirical likelihood. Strong formal support is found for this proposition. Specifically, our results suggest that supply shocks interacting with private sector beliefs about the nature of monetary regime together account for the rise and fall of U.S. inflation.

Keywords: Monetary policy; Expectations Trap; Time-varying parameters; Flexible Least Squares (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-07
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.mse.ac.in/wp-content/uploads/2016/09/working-paper-89.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2014-089

Access Statistics for this paper

More papers in Working Papers from Madras School of Economics,Chennai,India Contact information at EDIRC.
Bibliographic data for series maintained by Geetha G ().