Experimental evidence on the persistence of output and inflation

Klaus Adam ()

No 492, Working Paper Series from European Central Bank

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 behavior 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 behavior of output and inflation.

Keywords: Experiments; Output and Inflation Dynamics; Restricted Perceptions Equilibrium; Rational Expectations. (search for similar items in EconPapers)
JEL-codes: E32 E37 C91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-mac and nep-mon
Date: 2005-06
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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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Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20050492

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