780 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS to argue that when economic policies change, people adjust their expectations of inflation accordingly. Studies of inflation and unemployment that tried to estimate the sacrifice ratio had failed to take account of the direct effect of the policy regime on expectations. As a result, estimates of the sacrifice ratio were, according to the rational-expectations theorists, unreliable guides for policy. In a 1981 paper titled “The End of Four Big Inflations,” Thomas Sargent de-scribed this new view as follows: An alternative “rational expectations” view denies that there is any inherent momentum to the present process of inflation. This view maintains that firms and workers have now come to expect high rates of inflation in the future and that they strike inflationary bargains in light of these expectations. However, it is held that people expect high rates of inflation in the future precisely because the government’s current and prospective monetary and fiscal policies warrant those
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This note was uploaded on 08/01/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.