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Discussion Paper Details

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Title: Do expectations matter? The Great Moderation revisited

Author(s): Fabio Canova and Luca Gambetti

Publication Date: December 2009

Keyword(s): Expectations, Indeterminacy, Term structure and VARs

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Canova, F and Gambetti, L. 2009. 'Do expectations matter? The Great Moderation revisited'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7597