On the role of heuristics: Experimental evidence on inflation dynamics

Johann Graf Lambsdorff, Manuel Schubert () and Marcus Giamattei

No V-63-11, Passauer Diskussionspapiere, Volkswirtschaftliche Reihe from University of Passau, Faculty of Business and Economics

Abstract: We carry out an experiment on a macroeconomic price setting game where prices are complements. Despite relevant information being common knowledge and price flexibility we observe significant deviation from equilibrium prices and history dependence. In a first treatment we observe that equilibrium values were obtained in the long run but at the cost of a very slow adjustment and thus history dependence. By reporting a business indicator in a simpler form, subjects were given the chance to coordinate their prices by help of a heuristic in a second treatment. This option was widely taken, bringing about excess volatility and a deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe, contrary to theoretical predictions, the one-round ahead (publicly known) shock is significant, but future inflation is not. Our findings cast light on price dynamics when subjects have limited computational capacities.

Keywords: Inflation Persistence; Staggered Prices; Sticky Reasoning; New Keynesian Phillips Curve (search for similar items in EconPapers)
JEL-codes: C92 E31 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-exp and nep-mac
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Journal Article: On the role of heuristics—Experimental evidence on inflation dynamics (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:upadvr:v6311

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