ABSTRACT
In Frydman and Goldberg (2013c), we develop a CEHmodel that relates an economy’s inflation rate to the real interest rate. We argue that change in the macroeconomy, as represented by Db, depends on policy and institutional factors that tend to remain largely unchanged or that change very little for protracted stretches of time. During these periods, we would expect moderate or no change in the inflation process from one point in time to the next. However, major shifts in policy, institutions, and other factors do eventually occur. We would thus expect that periods of moderate or no change in the inflation process would be punctuated by relatively large shifts. Such larger scale change can be anticipated only dimly, if at all. Consequently, no one can fully anticipate when time intervals of moderate or no change in the macroeconomy might begin or end.
