Expectations and Monetary Policy: Experimental Evidence

Oleksiy Kryvtsov and Luba Petersen ()
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Luba Petersen: Simon Fraser University, http://www.sfu.ca/~lubap/

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: The effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, monetary policy is quite potent in providing stabilization, reducing roughly a half of macroeconomic variance.te potent in providing stabilization, reducing roughly a half of macroeconomic variance.

Keywords: Expectations; Monetary Policy; Inflation; Laboratory Experiment; Experimental Macroeconomics (search for similar items in EconPapers)
JEL-codes: C9 D84 E3 E52 (search for similar items in EconPapers)
Pages: 41
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Working Paper: Expectations and Monetary Policy: Experimental Evidence (2013)
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