Finance and Economics Discussion Series (FEDS)
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.
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