Chapter 17, Problem bFCT

To determine

Reason for Fed policy makers experience difficulties in determining which of the public’s inflation expectations are the best signals of inflationary pressures in the economy.

Concept introduction:

Inflation occurs when the prices of goods and services increase over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. Some Issues while measuring inflation could be when

1. the structure of the economy is constantly evolving in ways that are imperfectly understood by both the public and policymakers
2. the policymakers' objective function is not fully known by private agents.
3. long-run inflation expectations do vary over time.
4. Different Measures of Inflation: To project core inflation at longer-term horizons, a range of econometric models are used which gives diverse results since the model specifications employed differ considerably in their details, including how lagged inflation enters the equation, how resource utilization is measured, and whether a survey-based measure of inflation expectations are included or not.