Expectations Of Stability Tend To Be A Self-Fulfilling Prophecy
By Randall S. Kroszner
Randall S. Kroszner is a member of
the Board of Governors of the United
States Federal Reserve System. Prior
to his appointment, he was professor
of economics at the University of
Chicago Graduate School of Business
and director of the George J. Stigler
Center for the Study of the Economy
and the State. His research interests
include conflicts of interest in financial services firms, international
financial crises, corporate governance, debt restructuring
and bankruptcy, and monetary economics. He
was a member of the Council of Economic Advisers from
November 2001 until June 2003. He has a Sc.B. magna
cum laude in applied mathematics-economics from Brown
University, an M.A. from Harvard University, and a Ph.D.
in economics from Harvard University.
Inflation in the United States and elsewhere has become lower and more stable over the past two decades. It is likely that monetary policy has played an important role in this change in inflation dynamics by creating expectations of stability. This paper traces the evolution of the role of expectations in thinking about inflation, the supporting evidence over the past two decades, and role of central banks in influencing expectations. Increased global integration has magnified these effects. However, the importance of factors other than monetary policy implies that policymakers must consider a wide range of information before acting. Moreover, expectations of inflation stability cannot be taken for granted; and policymakers must be vigilant against complacency.
