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Frictions, Persistence, and Central Bank Policy in an Experimental Dynamic Stochastic General Equilibrium Economy

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  • Noussair, C.N.
  • Pfajfar, D.
  • Zsiros, J.

    (Tilburg University, Center for Economic Research)

Abstract

New Keynesian dynamic stochastic general equilibrium models are the principal paradigm currently employed for central bank policymaking. In this paper, we construct experimental economies, populated with human subjects, with the structure of a New Keynesian DSGE model. We give individuals monetary incentives to maximize the objective functions in the model, but allow scope for agents' boundedly rational behavior and expectations to influence outcomes. Subjects participate in the roles of consumer/workers, producers, or central bankers. Our objective is twofold. The first objective is general, and is to create an experimental environment for the analysis of macroeconomic policy questions. The second objective is more focused and is to consider several specific research questions relating to the persistence of shocks, the behavior of human central bankers, and the pricing behavior of firms, using our methodology. We find that the presence of menu costs is not necessary to generate persistence of output shocks, but rather that monopolistic competition in the output market is sufficient. Interest rate policies of human discretionary central bankers are characterized by persistence in interest rate shocks, the use of the Taylor principle, and lower output and welfare than under an automated instrumental rule. Pattens in price changes conform closely to stylized empirical facts.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-030.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011030

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Web page: http://center.uvt.nl

Related research

Keywords: Experimental Economics; DSGE economy; Monetary Policy; Menu costs;

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References

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  1. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  2. Luis J. Álvarez, 2007. "What do micro price data tell us on the validity of the New Keynesian Phillips Curve?," Banco de Espa�a Working Papers 0728, Banco de Espa�a.
  3. Jim Engle-Warnick & Nurlan Turdaliev, 2006. "An Experimental Test Of Taylor-Type Rules With Inexperienced Central Bankers," Departmental Working Papers 2005-02, McGill University, Department of Economics.
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Cited by:
  1. Lambsdorff, Johann Graf & Schubert, Manuel & Giamattei, Marcus, 2013. "On the role of heuristics—Experimental evidence on inflation dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1213-1229.
  2. Bastian Henze & Charles Noussair & Bert Willems, 2012. "Regulation of network infrastructure investments: an experimental evaluation," Journal of Regulatory Economics, Springer, vol. 42(1), pages 1-38, August.
  3. Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.
  4. Wolfgang Luhan & Johann Scharler, 2013. "Monetary Policy, Inflation Illusion and the Taylor Principle: An Experimental Study," Working Papers 2013-03, Faculty of Economics and Statistics, University of Innsbruck.

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