Prof. Zhang Fan: Government’s Role in Shaping Expectations

Dec 29-2022   

When it comes to making the public form rational and stable expectations, the resoluteness and consistency of government policy are of immense value, wrote Prof. Zhang Fan, NSD Professor of Economics, in a commentary.

Expectation, as a variable, makes part of the modern model on total demand and total supply and exerts considerable impact on both. Therefore, stabilizing expectation at a reasonable level benefits the stabilization of current macro-economy, noted Prof. Zhang.

He distinguished between two types of expectations: adaptive and rational, and believed that the latter can help a large group of people avoid making systemic mistakes over a long period when they use all available information to make predictions. In other words, expectations self-fulfill through rational decisions and behavior.

The government has two ways to help producers and consumers form reasonable and stable expectations. For one, information must be transparent, so that the public can access full information for making judgments and decision; the other is that the government must make the public believe in its policy, not just through promulgation but also through concrete measures that prove the government’s steadfastness and consistency in policy implementation. Prof. Zhang cited the example of then Fed Chairman Paul Volcker in his determined attitude and resolute fight against inflation in the 1980s, which made the public believe in Fed policy and led to a relatively fast end to inflation.