Experimental Evidence on the Persistence of Output and Inflation

Klaus Adam ()

No 4885, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behaviour emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behaviour of output and inflation.

Keywords: experiments; output and inflation dynamics; rational expectations; restricted perceptions equilibrium (search for similar items in EconPapers)
JEL-codes: C91 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-exp and nep-mac
Date: 2005-01
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Related works:
Working Paper: Experimental evidence on the persistence of output and inflation (2005)
Journal Article: Experimental Evidence on the Persistence of Output and Inflation (2007)
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