Near-Rationality and Inflation in Two Monetary Regimes

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  • 1 January 2000
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      • Published in RePEc
Abstract
Sticky-price models with rational expectations fail to capture the inertia in US inflation Models with backward-looking expectations capture current inflation behavior but are unlikely to fit other monetary regimes This paper seeks to overcome these problems with a near-rational model of expectations In the model agents make univariate forecasts of inflation: they use information on past inflation optimally but they ignore other variables The paper tests sticky-price models with near-rational expectations for two periods in US history the post-1960 period of persistent inflation and the period from 1879 to 1914 when inflation was not persistent The models fit the data for both periods; in contrast both rational-expectations and backward-looking models fail for at least one period
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