The Expectations Trap Hypothesis
Lawrence J. Christiano, Christopher J. Gust
NBER Working Paper No. 7809
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. Which hypothesis is more plausible has important implications for what needs to be done to prevent other inflation flare-ups.
Published: Christiano, Lawrence J. and Christopher Gust. "The Expectations Trap Hypothesis," FRB Chicago - Economic Perspectives, 2000, v24(2,Second-Qtr), 21-39.