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The Formation of Expectations, Inflation and the Phillips Curve

Olivier Coibion, Yuriy Gorodnichenko and Rupal Kamdar

No 23304, NBER Working Papers from National Bureau of Economic Research, Inc

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: E3 E4 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-03
Note: EFG IFM ME
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Published as Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, vol 56(4), pages 1447-1491.

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