How Inflation Hawks Escape Expectations Traps

1. What is the Phillips curve? What tradeoff did policymakers initially believe it offered?

2. Why did Milton Friedman believe there was no long-run tradeoff between inflation and unemployment?

3. What is an expectations trap? What circumstances can lead a central bank into one?

4. What specific predictions does Leduc test in his empirical work? Do his findings support the existence of an expectations trap during the 1960s and 1970s? Why?

5. Leduc describes the appointment of Paul Volcker as Chairman of the Federal Reserve in 1979 as “a change that is often viewed as the Waterloo for rampant inflation.” Does Leduc’s evidence support this view?

6. Why is the expectations-trap hypothesis controversial? Why is the expectations trap important for today’s policymakers?

Source: “How Inflation Hawks Escape Expectations Traps.” Sylvain Leduc, Federal Reserve Bank of Philadelphia Business Review, First Quarter 2003, pp. 13-20.