Managing self-organization of expectations through monetary policy: A macro experiment

Tiziana Assenza, P. Heemeijer, Cars Hommes and Domenico Massaro

Journal of Monetary Economics, 2021, vol. 117, issue C, 170-186

Abstract: The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank’s ability to control inflation to the impact that monetary policy has on the type of feedback –positive or negative– between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.

Keywords: Laboratory experiments; Monetary policy; Expectations; Taylor principle (search for similar items in EconPapers)
JEL-codes: C91 C92 D84 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Related works:
Working Paper: Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment (2021)
Working Paper: Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment (2018)
Working Paper: Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:170-186

DOI: 10.1016/j.jmoneco.2019.12.005

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