The Human Nature of Inflation: The Role of Defensive Expectations

This book develops the concept of defensive expectations in relation to inflation. It examines how after an income loss, people save more to make up for that loss – these are compensatory savings, in excess of precautionary savings and indifferent to interest rate cuts. Inflation stays low until households fully recover their loss and it increases afterwards. People think of their loss in terms of sk, which is calculated by the cumulative wage gap – a better measure of slack than the output...