Frictions, Persistence, and Central Bank Policy in an Experimental Dynamic Stochastic General Equilibrium Economy
AbstractNew 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-030.
Date of creation: 2011
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
Experimental Economics; DSGE economy; Monetary Policy; Menu costs;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-09 (All new papers)
- NEP-CBA-2011-04-09 (Central Banking)
- NEP-DGE-2011-04-09 (Dynamic General Equilibrium)
- NEP-MAC-2011-04-09 (Macroeconomics)
- NEP-MON-2011-04-09 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jim Engle-Warnick & Nurlan Turdaliev, 2005.
"An Experimental Test Of Taylor-Type Rules With Inexperienced Central Bankers,"
- Jim Engle-Warnick & Nurlan Turdaliev, 2006. "An Experimental Test of Taylor-Type Rules with Inexperienced Central Bankers," CIRANO Working Papers 2006s-05, CIRANO.
- 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.
- 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.
- Álvarez, Luis J., 2007.
"What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?,"
Economics Discussion Papers
2007-46, Kiel Institute for the World Economy.
- Alvarez González, Luis Julián, 2008. "What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(19), pages 1-36.
- Luis J. Alvarez, 2007. "What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?," Kiel Working Papers 1330, Kiel Institute for the World Economy.
- Luis J. Álvarez, 2007. "What do micro price data tell us on the validity of the New Keynesian Phillips Curve?," Banco de Espaï¿½a Working Papers 0728, Banco de Espa�a.
- 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.
- Graf Lambsdorff, Johann & Schubert, Manuel & Giamattei, Marcus, 2011. "On the role of heuristics: Experimental evidence on inflation dynamics," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-63-11, University of Passau, Faculty of Business and Economics.
- Wolfgang J. Luhan & Johann Scharler, 2013.
"Monetary Policy, Inflation Illusion and the Taylor Principle – An Experimental Study,"
Ruhr Economic Papers
0402, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.