Using a generalization of a rational, partial information framework presented fully in Cukierman and Wachtel (1979), it is shown that there is a positive relationship between the variance of relative price change and the variance of inflationary expectations across markets in the economy. This implication is then tested empirically using data on the variance of relative price change and on the variance of directly measured expectations. The empirical evidence supports the view that there is a positive relationship between the two variances and that more than one-third of this relationship is explainable in terms of the model presented.

Using a generalization of a rational, partial information framework presented fully in Cukierman and Wachtel (1979), it is shown that there is a positive relationship between the variance of relative price change and the variance of inflationary expectations across markets in the economy. This implication is then tested empirically using data on the variance of relative price change and on the variance of directly measured expectations. The empirical evidence supports the view that there is a positive relationship between the two variances and that more than one-third of this relationship is explainable in terms of the model presented.