Inflation Expectations and the Transmission of Monetary Policy

摘要

New Keynesian models with sticky prices and rational expectations have a211u001edifficult time explaining why reducing inflation usually requires a recession. An 211u001eexplanation for the costliness of reducing inflation is that inflation 211u001eexpectations are less than perfectly rational. To explore this possibility, I 211u001eestimate the degree of nonrationality in two survey measures of inflation 211u001eexpectations. I find that the surveys reflect an intermediate degree of 211u001erationality: Expectations are neither perfectly rational nor as unsophisticated 211u001eas simple autoregressive models would suggest. I also find that a structural New 211u001eKeynesian model with expectations formation based on the survey results is able 211u001eto match closely the empirical costs of reducing inflation.