Strategic Complementarity and Slow Inflation Convergence: Evidence from Dynamic Beauty Contest

Kozo Ueda, Yoshio Kamijo and Hideaki Minami

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This study investigates why inflation converges only slowly to its target by combining laboratory experiments with structural estimation. We create a laboratory environment in which subjects act as ï¬ rms and set prices under Calvo-type stickiness, where profits are determined as a weighted average of competitors' prices and an exogenously given aggregate price. The experimental results show that both higher aggregate inflation and stronger strategic complementarity hinder convergence to the theoretical equilibrium under rational expectations. Using Bayesian MCMC estimation, we systematically compare subjects' behavior with rational-expectations predictions, allowing for small deviations motivated by bounded rationality. The results reveal that subjects overestimate strategic complementarity, which contributes to delayed inflation convergence.

Keywords: strategic complements; sticky prices; bounded rationality (search for similar items in EconPapers)
JEL-codes: C92 E32 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2025-10
New Economics Papers: this item is included in nep-exp, nep-gth and nep-mon
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https://crawford.anu.edu.au/sites/default/files/20 ... da_Kamijo_Minami.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-57

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