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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. JEL Classification: E32, E37, C91

Keywords: Experiments; Output and Inflation Dynamics; rational expectations; Restricted Perceptions Equilibrium (search for similar items in EconPapers)
Date: 2005-06
Note: 321199
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Journal Article: Experimental Evidence on the Persistence of Output and Inflation (2007)
Working Paper: Experimental Evidence on the Persistence of Output and Inflation (2005) Downloads
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