A joint study of expectations formation and the shifting Phillips curve

To avoid certain problems associated with the use of a deterministic distributed lag function of past prices as an observable proxy for inflationary expectations, we estimated an unobservable-variable model which accommodates not only some errors in measurement in the survey data on expectations but also the presence of a stochastic error term in the distributed lag function determining an unobservable variable. We incorporate four hypotheses on expectations formation, including a new one which is a mixture of both regressive and adaptive elements. The estimated coefficient corresponding to the price-expectations variable in the Phillips curve was always more than 0.50.