Does the expectations trap render the Natural-Rate Model invalid in the disinflationary zone?

Abstract

This paper questions the validity of the Natural-Rate Expectations Augmented Phillips curve (N-REAP) model by examining the concept of an ‘expectations trap’. If a Phillips curve becomes horizontal at higher levels of unemployment—as it did in the curves derived from a century of data by Phillips and Lipsey—then policy-induced increases in unemployment can reduce neither inflation nor inflationary expectations. The expectations trap, therefore, tends to render the policy conclusions derived from the N-REAP model either invalid or intolerably slow in the disinflation region.