Abstract
The purpose of the paper is to study the role of expectations in the context of a macroeconomic model of the standard type, consisting of a demand, a supply and a financial submodel. Inflationary expectations are introduced via a supply-price-function of labor (a modified Phillipscurve). In contrast to many other models inflationary expectations are endogenous in this paper; they are incorporated into the labormarket. We assume that real demand is increased exogenously and study the change of the equilibrium position in the three submodels. The change of equilibrium will affect the actual price level and will be reflected in the price expectations. The main result is that a fully anticipated change in the price level has no real effects (i.e. no employment and no production effect). Only failures to anticipate correctly the rate of inflation will influence the real economy. For the financial submodel, the condition for real effects is that the interest flexibility of the demand for real balances is (numerically) larger than that of the demand for bonds.
Revised version of a paper presented at the Conference “Inflation in Small Countries”, Vienna, 8th – loth November 1974. I am grateful to valuable comments by Michael Parkin and Ishag Nadiri.
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Frisch, H. (1976). Inflationary Expectations in a Macroeconomic Model. In: Frisch, H. (eds) Inflation in Small Countries. Lecture Notes in Economics and Mathematical Systems, vol 119. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-46331-0_10
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DOI: https://doi.org/10.1007/978-3-642-46331-0_10
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