A behavioural investigation of inflation expectations

Abstract

Inflation expectations are at the centre of understanding modern macro-economic theory and monetary policy. They play a critical role in labour, product and financial markets. Representatives of labour and management need reliable forecasts of inflation in negotiating wage contracts. Individuals employ inflation forecasts in computing real interest rates for the purpose of making an array of financial decisions. Firms, for example, use real interest rates to make decisions on investment expenditures while households use this information to make purchases of consumer durables. Movement of capital internationally is largely driven by differences in real rates of return across countries.