DOES THE EXPECTATIONS TRAP RENDER THE NATURAL-RATE MODEL INVALID IN THE DISINFLATIONARY ZONE

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