Implications of the permanent-transitory confusion for New-Keynesian modelling, inflation forecasts, and the post-Global Crisis era

a column by Alex Cukierman for VOX: CEPR’s Policy Portal

Individuals are never fully certain whether economic developments are persistent or temporary.

This column shows that this permanent-transitory confusion has pervasive implications. It argues that the confusion injects the past into even purely forward-looking New-Keynesian frameworks, and shows empirically that inflationary forecasts indeed rely on past inflation.

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