Modelling Output and Inflation Using Direct Measures of Expectations

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