The Expectations Trap Hypothesis
We explore a hypothesis about the take-off in inflation that occurred in the early 1970s. According to the expectations trap hypothesis, the Fed was pushed into producing the high inflation out of a fear of violating the public?s inflation expectations. We compare this hypothesis with the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate byproduct of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what needs to be done to prevent other inflation flare-ups.
Suggested citation: Christiano, Lawrence J., and Christopher Gust, 2000. “The Expectations Trap Hypothesis,” Federal Reserve Bank of Cleveland, Working Paper, no. 00-04.