The importance of inflation expectations4 min read . Updated: 15 Jan 2018, 01:34 AM IST
The overall success of inflation-targeting framework depends on how credible the central bank is and how well the inflation expectations are being anchored
Monetary policy analysis in the new Keynesian framework has received considerable attention in recent times. The New Keynesian Phillips Curve (NKPC), one of the important blocks of the New Keynesian framework, has become a dominant tool to model inflation dynamics among central bankers. Unlike the traditional Phillips curve where inflation expectations are adaptive in nature, the NKPC is based on forward looking (rational) expectations. It relates current inflation to the expected future inflation and the output gap.
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