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November 1980

The "Rationality" of Survey-Based Inflation Forecasts

by R. W. Hafer and David H. Resler

The notion that economic agents rationally form their expectations about future economic events has emerged as a critically important hypothesis with profound implications for macroeconomic policy. For example, modern hypotheses relating to the Phillips curve emphasize that it is the departure of actual inflation from expected inflation that cause any short-run trade-off that may exist between inflation and unemployment. Consequently, empirical tests of many macro-theoretic models require the identification not only of directly observable phenomena, such as inflation and unemployment, but also of expectations or anticipations of these phenomena.