Editing Inflation (section)

==== Rational expectations theory ====

{{Further|Rational expectations}}

In the early 1970s, [[rational expectations theory]] led by economists like [[Robert Lucas Jr.|Robert Lucas]], [[Thomas J. Sargent|Thomas Sargent]] and [[Robert Barro]] transformed macroeconomic thinking radically. They held that economic actors look rationally into the future when trying to maximize their well-being, and do not respond solely to immediate [[opportunity cost]]s and pressures.<ref name=Blanchard/>{{rp|529–530}} In this view, future expectations and strategies are important for inflation as well. One implication was that agents would anticipate the likely behaviour of central banks and base their own actions on these expectations. A central bank having a reputation of being "soft" on inflation will generate high inflation expectations, which again will be self-fulfilling when all agents build expectations of future high inflation into their nominal contracts like wage agreements. On the other hand, if the central bank has a reputation of being "tough" on inflation, then such a policy announcement will be believed and inflationary expectations will come down rapidly, thus allowing inflation itself to come down rapidly with minimal economic disruption. The implication is that [[credibility]] becomes very important for central banks in fighting inflation.<ref name=Blanchard/>{{rp|467–469}}