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The expectations trap hypothesis

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Abstract

We explore a hypothesis about the take-off in inflation that occurred in the early 1970s. According to the expectations trap hypothesis, the Fed was pushed into producing the high inflation out of a fear of violating the public's inflation expectations. We compare this hypothesis with the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by-product of a conscious decision to jump-start a weak economy.

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  • Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," International Finance Discussion Papers 676, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:676
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    1. John H. Cochrane, 1999. "A Frictionless View of US Inflation," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421, National Bureau of Economic Research, Inc.
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    5. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
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    8. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    9. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
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    More about this item

    Keywords

    Inflation (Finance); Phillips curve; Monetary policy - United States;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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