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Copyright © Cambridge Political Economy Society

other

Does the expectations trap render the Natural-Rate Model invalid in the disinflationary zone?

Robert Leeson*

*Murdoch University Australia

Abstract

This paper questions the validity of the Natural-Rate Expectations Augmented Phillips curve (N-REAP) model by examining the concept of an ‘expectations trap’. If a Phillips curve becomes horizontal at higher levels of unemployment—as it did in the curves derived from a century of data by Phillips and Lipsey—then policy-induced increases in unemployment can reduce neither inflation nor inflationary expectations. The expectations trap, therefore, tends to render the policy conclusions derived from the N-REAP model either invalid or intolerably slow in the disinflation region.

Manuscript received October 30, 1994; final version received September 4, 1995.


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