Year: 2001
Type: report
Abstract: This paper reconsiders the Phelps-Lucas hypothesis, according to which temporary real effects of purely nominal disturbances result from imperfect information, but departs from the assumptions of Lucas (1973) in two crucial respects.Due to monopolistically competitive pricing, higher-order expectations are crucial for aggregate inflation dynamics, as argued by Phelps (1983).And decisionmakers' subjective perceptions of current conditions are assumed to be of imperfect precision, owing to finite information processing capacity, as argued by Sims (2001).The model can explain highly persistent real effects of a monetary disturbance, and a delayed effect on inflation, as found in VAR studies.
DOI: 10.3386/w8673
Author: Michael Woodford
Institutions: National Bureau of Economic Research, Princeton University
Language: English
Domain: Social Sciences
Open Access status: green
Funder: National Science Foundation
OpenAlex ID: W1481005446