Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory

Damjan Pfajfar and Blaž Žakelj

No 2015-45, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

Keywords: Inflation expectations; laboratory experiments; monetary policy design; New Keynesian model (search for similar items in EconPapers)
JEL-codes: C91 C92 E37 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-06-11
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015045pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.045 http://dx.doi.org/10.17016/FEDS.2015.045 (application/pdf)

Related works:
Journal Article: INFLATION EXPECTATIONS AND MONETARY POLICY DESIGN: EVIDENCE FROM THE LABORATORY (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-45

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