Modelling Output and Inflation Using Direct Measures of Expectations

This thesis provides an applied macroeconometric study of the determination of output and inflation and of stabilization policy. Its focus is on the time series analysis of output and inflation, concentrating on the use of direct measures of expectations and data obtained in real time, and modelled in multivariate settings. Direct measures of expectations are useful in this study as they allow a better understanding of the expectations formation processes as well as the role played by expectations in the output and inflation dynamics and in the conduct of monetary policy. The use of real time data is important as it focuses on information sets available when decisions are made. This study considers three empirical exercises using actual and expected output and inflation series for the UK and US for the last forty years and making use of different sources of survey data. They are presented to build an increasingly sophisticated picture of the interactions between growth, inflation and stabilization policy. The first chapter concentrates on the measurement of actual and expected inflation and output from different sources of survey data, eventually developing a multivariate framework with which to analyse expectations at different time horizons. The second chapter concentrates on the dynamics between actual and expected inflation and output, developing a simple growth model that distinguishes between the longrun trend in output and short and medium term fluctuation around that trend, with inflation assumed to be driven by a model of time-consistent monetary policy. The last chapter builds on the previous ones by considering a small macro model of the economy based on three main behavioural relationships: a Phillips curve, an IS curve and a monetary policy rule; its focus is on the role of expectations in the conduct of monetary policy.