DP7597 Do expectations matter? The Great Moderation revisited
|Author(s):||Fabio Canova, Luca Gambetti|
|Publication Date:||December 2009|
|Keyword(s):||Expectations, Indeterminacy, Term structure, VARs|
|JEL(s):||C11, E12, E32, E62|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7597|
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.