The expectations hypothesis and its policy implications for Australia.
Creators: name: Challen, D. W.
Publisher: name: University Of Tasmania
Year: 2023

description: The expectations hypothesis has received considerable attention in the recent literature on inflation theory and policy. This is due partly to the fact that it provides an appealing explanation of the phenomenon of stagflation, the coexistence of high unemployment with accelerating inflation, and partly to the fact that it gives rise to the important distinction between the short-run and the long-run inflation-unemployment trade-off and to consequential challenging implications for the formulation of anti-inflation policy. Despite the attention which the hypothesis has received, the literature suffers from two notable deficiencies. The first is general, namely that there is nowhere in the literature a detailed theoretical analysis of the behavioural implications of the expectations hypothesis. The second deficiency is specific to the Australian literature namely that there has been no research directed at examining the appropriateness of the expectations hypothesis (at least in its conventional form) for the Australian economy. One study has considered a modified form of the expectations hypothesis with reference to the Australian economy but that study has been shown to suffer from important methodological and empirical deficiencies such that little faith can be placed in its conclusions. The two main aims of this thesis are related to the deficiencies of the literature just mentioned. The first main aim is to provide a complete and detailed theoretical analysis of the behavioural implications of the expectations hypothesis and, as a iv. corollary, to examine the relevance of these behavioural implications for the formulation of anti-inflation policy. The second aim is to determine empirically whether the expectations hypothesis can be considered appropriate for the Australian economy. The achievement of the latter aim is by no means straightforward, since the statistical and data problems involved are considerable. An introduction to the thesis is presented in Chapter One. Four prototype models of the expectations hypothesis are specified in Chapter Two which also undertakes an examination of their behavioural implications and their implications for the formulation of anti-inflation policy. Thus, the first of tho two main aims of the thesis is achieved in Chapter Two. A review of the empirical literature associated with the four prototype models is undertaken in Chapter Three. The problems inherent in a consideration of the appropriateness of these prototype models for the Australian economy are considered in Chapter Four and the approach to these problems to be adopted in the thesis is described. A description and critical assessment of the adequacy of the data used for the purposes of the econometric estimation of the parameters of the prototype models is given in Chapter Five. The results of these estimations of the structural parameters of various versions of the prototype models are presented in Chapter Six and a preferred estimation selected for each of the prototype models. This allows achievement of the second main aim of the thesis. It is found that none of the prototypemodels can be considered appropriate for the Australian economy on the basis of the specification of the models on which the estimates reported in Chapter Six are based, but that at least one of the prototype models shows considerable promise. Finally, a number of ways in which the prototype models could be modified and extended are considered in Chapter Seven, which concludes with a number of suggestions for further work on the expectations hypothesis in the context of the Australian economy.