Why do monetary policies matter?: An experimental study of saving and inflation in an overlapping generations model

Michele Bernasconi and Oliver Kirchkamp

No 98-47, Papers from Sonderforschungsbreich 504

Abstract: We study experiments of an overlapping generations model where inflation is determined by the monetary policy and by the amount of average saving within each period. We use a new experimental setup that allows us to observe more details of the process of expectation forming and separate this process from the actual saving process. In contrast to experimental findings by Lim, Prescott, Sunder; Marimon, Spear, Sunder; and Marimon, Sunder we find that (1) agents do not form first-order adaptive expectations; (2) subjects ‘over-save’ for precautionary reasons; as a result (3) the so-called Friedman conjecture holds, i.e. monetary policies which are equivalent in static equilibrium exhibit different levels and different volatility of inflation in the experiment. This may generate important policy trade-offs between monetary regimes. We discuss our findings and relate them to current research on adaptive learning and the role it may have in ranking alternative monetary policies.

Keywords: OLG-model; expectations; inflation; stability; monetary policy; experiments (search for similar items in EconPapers)
JEL-codes: C92 E21 E31 E52 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (1)

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Journal Article: Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model (2000)
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