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Monetary Policy and Expectations: Effects on the Output Level, an Empirical Approach
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2014 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The common knowledge of macroeconomic theory suggests that in the long-run the Phillips curve is vertical and there is no trade-off between inflation and unemployment rate. The expectations-augmented Phillips curve specification implies that in the long-run, on average, whenever inflation expectations are consistent with the level of inflation, the output level should be equal to its potential. However, considering surveys on expected inflation rates in Sweden, Canada and New Zealand, it emerges that agents are not always able to correctly predict future inflation. As consequence of this process, it is possible to hypothesise that GDP may deviate from its potential level. In light of that, this work has examined how unexpected inflation and output gap are related through the process of wage bargaining. To assess this phenomenon it has been considered the cases of Sweden, where the Riksbank (the Swedish central bank) has undershot the target for a long period of time, Canada and New Zealand, which have both maintained the inflation on the announced target (As for New Zealand, in the target range). After a statistical assessment, the findings are the following, in the Swedish case exists a trade-off between rationality of expectations and credibility of the monetary policy. On the other hand, according to the Canadian experience, rationality and credibility do not contradict each other. Finally, no relevant findings have emerged after the analysis of the New Zealander case.

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URN: urn:nbn:se:uu:diva-226568OAI: oai:DiVA.org:uu-226568DiVA: diva2:726441
Available from: 2014-06-18 Created: 2014-06-18 Last updated: 2014-06-18Bibliographically approved

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