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.