Working Paper: CEPR ID: DP7597
Authors: Fabio Canova; Luca Gambetti
Abstract: We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model.
Keywords: expectations; indeterminacy; term structure; VARs
JEL Codes: C11; E12; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expectations (D84) | Inflation (E31) |
| Expectations (D84) | Interest Rates (E43) |
| Omitting Expectations (D84) | Overestimated Variances of Shocks (Indeterminate Regime) (C51) |
| Expectations (D84) | Predictive Power of Output Growth, Inflation, and Nominal Interest Rates (O42) |
| Expectations (D84) | Variances of Reduced-Form Shocks (C22) |