International Finance Discussion Papers (IFDP)
August 2000
The Expectations Trap Hypothesis
Lawrence J. Christiano and Christopher Gust
Abstract:
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.
Keywords: 1970s inflation, Arthur Burns, monetary policy, Taylor Rule
PDF: Full Paper
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