Food Prices, Expectations, and Inflation

Carl Van Duyne

American Journal of Agricultural Economics, 1982, vol. 64, issue 3, 419-430

Abstract: This paper explores a hypothesis about the formation of inflation expectations, popular among policy makers, which states that economic agents place a greater weight on the recent behavior of food prices when forming expectations than expenditure shares would indicate. This hypothesis is termed the biased expectations hypothesis (BEH). Using a stochastic fixprice-flexprice model of the U.S. economy, I derive the implications of the BEH for the overall rate of inflation and demonstrate that a bias in the formation of expectations may be Muth-rational. The empirical results suggest that there is no bias in the formation of expectations of any consequence for policy.

Date: 1982
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:64:y:1982:i:3:p:419-430.

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