Pricing Decisions in an Experimental Dynamic Stochastic General Equilibrium Economy

27 Pages Posted: 22 Nov 2014

See all articles by Charles N. Noussair

Charles N. Noussair

Tilburg University

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Janos Zsiros

Cornell University

Date Written: October 24, 2014

Abstract

We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory econ omy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.

Keywords: Experimental economics, DSGE economy, pricing behavior, menu costs

JEL Classification: C91, C92, E31, E32

Suggested Citation

Noussair, Charles N. and Pfajfar, Damjan and Zsiros, Janos, Pricing Decisions in an Experimental Dynamic Stochastic General Equilibrium Economy (October 24, 2014). FEDS Working Paper No. 2014-93. Available at SSRN: https://ssrn.com/abstract=2529186 or http://dx.doi.org/10.2139/ssrn.2529186

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Damjan Pfajfar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Janos Zsiros

Cornell University ( email )

Ithaca, NY 14853
United States

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