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American Economic Journal: Macroeconomics: Vol. 2 No. 3 (July 2010)

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Do Expectations Matter? The Great Moderation Revisited

Article Citation

Canova, Fabio, and Luca Gambetti. 2010. "Do Expectations Matter? The Great Moderation Revisited." American Economic Journal: Macroeconomics, 2(3): 183-205.

DOI: 10.1257/mac.2.3.183

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. (JEL E23, E24, E31, E32)

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Authors

Canova, Fabio (U Pompeu Fabra and U Autonoma de Barcelona)
Gambetti, Luca (U Pompeu Fabra and U Autonoma de Barcelona)

JEL Classifications

E23: Macroeconomics: Production
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles

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