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Experimental evidence on the persistence of output and inflation Author info | Abstract | Publisher info | Download info | Related research | Statistics Klaus Adam () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany )
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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.
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Paper provided by European Central Bank in its series Working Paper Series with number
492.
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Length: 60 pages
Date of creation: Jun 2005Date of revision:
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Keywords: Experiments ; Output and Inflation Dynamics ; Restricted Perceptions Equilibrium ; Rational Expectations. ; Other versions of this item:
Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
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