NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Formation of Expectations, Inflation and the Phillips Curve

Olivier Coibion, Yuriy Gorodnichenko, Rupal Kamdar

NBER Working Paper No. 23304
Issued in March 2017, Revised in November 2017
NBER Program(s):EFG, IFM, ME

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.

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Document Object Identifier (DOI): 10.3386/w23304

 
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