TY  - JOUR
AU  - Ball,Laurence
TI  - Near-Rationality and Inflation in Two Monetary Regimes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7988
PY  - 2000
Y2  - October 2000
UR  - http://www.nber.org/papers/w7988
L1  - http://www.nber.org/papers/w7988.pdf
N1  - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu
AB  - Sticky-price models with rational expectations fail to capture the inertia in U.S. inflation. Models with backward-looking expectations capture current inflation behavior, but are unlikely to fit other monetary regimes.  This paper seeks to overcome these problems with a near-rational model of expectations. In the model, agents make univariate forecasts of inflation: they use information on past inflation optimally, but they ignore other variables.  The paper tests sticky-price models with near-rational expectations for two periods in U.S. history, the post-1960 period of persistent inflation and the period from 1879 to 1914, when inflation was not persistent. The models fit the data for both periods; in contrast, both rational-expectations and backward-looking models fail for at least one period.
ER  -