Since its adoption, well-anchored inflation expectations have allowed businesses, individuals and families to take a longer view in their planning, which has led to a better allocation of economic and financial resources and a more stable economy overall. Decision making and expectation formation So we know that expectations are crucial, but what do we know about how they are formed?
Those decisions do not depend on people knowing the current level of the NAIRU, or even that such a thing exists. Rather, people make decisions about the level and rate of change in wages to offer; those decisions are presumed to relate in some systematic way to the state of the labour market.