Experimental Evidence on the Persistence of Output and Inflation
62 Pages Posted: 21 Jun 2005
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Experimental Evidence on the Persistence of Output and Inflation
Experimental Evidence on the Persistence of Output and Inflation
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: Suggested Citation
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