Experimental Evidence on the Persistence of Output and Inflation

62 Pages Posted: 21 Jun 2005

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

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Date Written: June 2005

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.

Keywords: Experiments, Output and Inflation Dynamics, Restricted Perceptions Equilibrium, Rational Expectations

JEL Classification: E32, E37, C91

Suggested Citation

Adam, Klaus, Experimental Evidence on the Persistence of Output and Inflation (June 2005). Available at SSRN: https://ssrn.com/abstract=726686 or http://dx.doi.org/10.2139/ssrn.726686

Klaus Adam (Contact Author)

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6597 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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