ABSTRACT
Current models of inflation expectations are highly dependent on a stable institutional setting in which central banks have control over monetary policy. This chapter focuses on two historical episodes in which central banks played a much more limited role than today: first, the gold standard of the late nineteenth century from the perspective of the United States; second, the early 1970s as the last years of the Bretton Woods system from the perspective of the Federal Republic of Germany. During both periods, monetary shocks—often the result of politically motivated changes—led to a widespread questioning of the stability of the institutional setting itself and limited the role of information on exogenous factors that quantity theorists would consider crucial. The chapter focuses on firms to argue that in such historical contexts of policy uncertainty, business expectations need to be understood within the larger context of politics, and cannot be rationalized following a simple model of profit calculation and inflation expectations.
