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Rational Expectations and the Role of Monetary Policy: Some Tests Based on the Fisher Equation

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  • Ali F. Darrat

Abstract

This paper tests, for the United Kingdom, the Lucas/Sargent and Wallace proposition that inflation influences real output if it is unexpected. Rational estimates of expected and unexpected inflation are derived using the Fisher/Fama hypothesis regarding the relationship between nominal (market) interest rates and expected inflation, but where real interest rates are allowed to vary. The empirical results, based on a modified real output model, do not contradict the Lucas/Sargent and Wallace proposition. As such, these results cast doubts on the usefulness of systematic inflationary (monetary) policy for stabilizing the real side of the British economy even in the short run.

Suggested Citation

  • Ali F. Darrat, 1988. "Rational Expectations and the Role of Monetary Policy: Some Tests Based on the Fisher Equation," Eastern Economic Journal, Eastern Economic Association, vol. 14(3), pages 211-219, Jul-Sep.
    • Handle: RePEc:eej:eeconj:v:14:y:1988:i:3:p:211-219
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    References listed on IDEAS

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