Experimental Evidence on the Persistence of Output and Inflation

By Klaus Adam. Social Science Research Network, 2007

223 citations recorded by the source corpus.

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

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b10951e3d548e7241d207294458e749d0205a1ea

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Cars H. Hommes
2. D. Massaro
3. Florian Wagener
4. George W. Evans
5. J. Duffy
6. Seppo Honkapohja
7. T. Assenza
8. Gabriele Galati

Citations in the corpus

• Individual Expectations and Aggregate Macro Behavior (2011, methodology): “…laboratory environment to study individual expectations have been carried out by, e.g., Hommes, Sonnemans, Tuinstra, and van de Velden (2005), Adam (2007), Pfajfar and Zakelj (2010); see Duffy (2008) for an overview of macro experiments, and Hommes (2011) for an overview of learning to…”
• Heterogeneous Expectations in Monetary DSGE Models (2013, unknown): “Carroll (2003), Mankiw, Reis, and Wolfers (2003), Branch (2004), Pfajfar and Santoro (2010) and Pfajfar (2008) recently provided empirical evidence in support of heterogeneous expectations using survey data on inflation expectations, while Hommes, Sonnemans, Tuinstra, and van de Velden (2005), Adam ”
• Behavioral & Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach (2018, background): “Adam et al. (2011) consider a housing market model with Bayesian learning of an internally rational” representative agent; Ascari et al.”
• Exposure to Daily Price Changes and Inflation Expectations (2019, unknown): “Our paper also build on Cavallo, Cruces, and Perez-Truglia (2017), who study (4)Also, Adam (2007) shows experimentally that individuals use “simple” forecast functions to form inflation expectations that deviate from the rational forecasts.”
• Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments (2012, unknown): “(2010) consider markets of agricultural goods in a cobweb framework, while Adam (2007), Assenza et al.”
• Macroeconomics: A Survey of Laboratory Research (2016, methodology): “…, though coordination on the rational expectations equilibrium was likely help by having a unique equilibrium and a limited price range ( 0 , 10 ) Adam ( 2007 ) uses a similar experimental methodology but in the context of the two - equation , multivariate New Keynesian " sticky price " model…”
• Learning and Macroeconomics (2009, background): “For recent papers, see Branch (2004), Adam (2007) and Pfajfar and Santoro (2007). In addition to the empirical topics covered in our review, there are applications of learning to several other areas. One new example is DSGE models, see Milani (2007) and Slobodyan and Wouters (2007).”
• Heterogeneous Agent Models in Economics and Finance, In: Handbook of Computational Economics II: Agent-Based Computational Economics, edited by Leigh Tesfatsion and Ken Judd, Elsevier, Amsterdam 2006, pp.1109-1186 (2005, unknown): “Notice that the parameter h = (u(1)−u(−1))/2, i.”
• Did the Crisis Affect Inflation Expectations (2012, background): “Another strand of literature relies on economic experiments (e.g., Marimon and Sunder 1994; Hommes et al. 2005, 2007; Adam 2007).”
• Complex Evolutionary Systems in Behavioral Finance (2008, methodology): “Similar experiments have been performed by van de Velden (2001), Gerber et al. (2002), Sutan and Willinger (2005), Adam (2007), Hommes et al. (2007) and Heemeijer (2007); see also the recent survey in Duffy (2007).”