Market power and efficiency

This paper introduces new measures of the mean and variance of inflation and growth expectations, based on tendency survey data from four major European economies. The expectations measures are technically ‘irrational’, but more accurate than naive alternatives; expectations errors do not persist for more than a year. Unexpected inflation, and uncertainties about inflation and growth, play the roles assigned them by New Classical macroeconomic theory, respectively raising and lowering real activity. All the expectations, uncertainties and errors appear more closely correlated across countries than experience would justify, suggesting that unpredictable disturbances typically have an internal rather than an international origin.