By Helmut Frisch
A survey of the recent theories of inflation that experience built during the last twenty years according to the inflationary pressures skilled by means of Western international locations examines the transferring debate from explaining inflation as a "causal" approach to explaining its raise because of regularly altering expectancies.
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Additional info for Theories of Inflation (Cambridge Surveys of Economic Literature)
However, the estimation error irt - E(7rt/It-i) cannot contain a systematic component; in statistical theory, rational expectations produce an unbiased estimate of the future values of the endogenous variable. The model of rational expectations therefore rests on the following assumptions: a. All economic agents know the "true" model and its parameters; more precisely, they know the correct specification of the reduced form of the model. b. , they know the reaction functions of economic policy makers).
20] Both workers and employers suffer from money illusion. Workers interpret increases in their money wages as increases in real wages. Employers think an increase in the price of their product implies an increase in its price relative to those of other goods and services. E. Lucas (1972a, 1973), which says that individual economic actors cannot in general differentiate between price increases caused by monetary factors (increase in the money supply) and price increases traceable to real factors (increase in real demand).
The main idea of the Phillips-Lipsey model is that wage inflation is explained by excess demand in the labor market, whereby the rate of unemployment is interpreted as an indicator of the level of excess demand. The first stage in the history of the Phillips curve was further characterized by the beliefs that a stablerelationship Phillips curve exists and that policy makers can exploit the trade-off between inflation and unemployment by choosing alternative points on the Phillips curve. ) In the second stage the natural rate of unemployment hypothesis (the NR hypothesis), developed independently by M.