Defensive Expectations: Reinventing the Phillips Curve as a Policy Mix

This book provides a new theory of inflation that explains why inflation remains subdued after recessions, based on defensive expectations, compensatory savings, and cumulative wage gap. It is tested and validated by data for the US and 35 OECD countries. The book calls for an optimal policy mix between monetary and fiscal policy and discusses the coronavirus crisis as an extreme case of defensive expectations.

Format: Paperback / softback
Length: 196 pages
Publication date: 11 December 2021
Publisher: Springer Nature Switzerland AG

This comprehensive book delves into the fascinating realm of understanding why inflation remains relatively subdued after economic downturns, employing three revolutionary concepts: defensive expectations, compensatory savings, and cumulative wage gap. When income decreases, consumption naturally decreases, and savings increase as individuals work towards rebuilding their past wealth. Households refrain from spending excessively until they fully recover their losses. The revised Phillips Curve sheds light on the current inflation dynamics, revealing that it hinges on the cumulative difference between current income and past income.

To test and validate this novel theory, extensive data spanning from 1960 to the present for the United States and from 1990 to the present for 35 OECD countries has been analyzed. The findings from this rigorous examination provide valuable insights into the workings of the economy.

From these results, a range of policy implications emerge. The book advocates for an optimal policy mix that combines monetary and fiscal policies, recognizing the complementary roles they play in shaping economic outcomes. Additionally, it delves into the coronavirus crisis as an extreme case of defensive expectations, highlighting the importance of proactive measures to mitigate the impact of such crises.

This thought-provoking book offers a deep dive into the complex dynamics of inflation, providing a valuable resource for economists, policymakers, and anyone interested in gaining a deeper understanding of the economic landscape. By exploring these revolutionary concepts and applying them to real-world data, it sheds light on the mechanisms that govern inflation and offers practical insights for navigating economic challenges.

Weight: 303g
Dimension: 210 x 148 (mm)
ISBN-13: 9783030550479
Edition number: 1st ed. 2021