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The Expectations Trap Hypothesis

42 Pages Posted: 26 Jul 2000  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Date Written: July 2000

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.

JEL Classification: E1

Suggested Citation

Christiano, Lawrence J. and Gust, Christopher J., The Expectations Trap Hypothesis (July 2000). NBER Working Paper No. W7809. Available at SSRN: https://ssrn.com/abstract=237131

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
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847-491-8231 (Phone)
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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

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Washington, DC 20551
United States

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