Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, October 19, 2005

Playing the Short-Run Phillips Curve

So long as people expect the rate of inflation to stay within the limits/targets set by central bankers, policy makers can probably have some (a bit of) success trying to move the economy back and forth, up and down along the inflation/unemployment tradeoff.

The trouble is that keeping the expected rate of inflation in the targeted range is not always easy. And once we experience rates of inflation different from the targeted rates for any length of time, we adjust our expectations.

What I have set out above is the heart of an error-learning/adaptive expectations model. This model is clearly more descriptive of the macroeconomy than any of the rationalized expectorations [or, if you prefer, rational expectations] models that were all the rage in many circles over the past several decades.

For more on expectations and inflation rates, see, for example, this and this by David Altig during the past week.
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