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Abstract

We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics.

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Bibliographic Info

Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2005-02.

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Length: 37 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:mcl:mclwop:2005-02

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Find related papers by JEL classification:

• C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
• E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

This paper has been announced in the following NEP Reports:

• NEP-ALL-2006-09-23 (All new papers)
• NEP-CBA-2006-09-23 (Central Banking)
• NEP-EXP-2006-09-23 (Experimental Economics)
• NEP-MAC-2006-09-23 (Macroeconomics)
• NEP-MON-2006-09-23 (Monetary Economics)

References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:

1. What can Governors do?
   by chris dillow in Stumbling and Mumbling on 2012-11-27 14:22:21

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Cited by:

1. Jim Engle-Warnick & Sonia Laszlo Author Email: sonia.laszlo@mcgill.ca, 2006. "Learning By Doing In An Ambiguous Environment," Departmental Working Papers 2006-29, McGill University, Department of Economics.
   
   • Jim Engle-Warnick & Sonia Laszlo, 2006. "Learning-by-Doing in an Ambiguous Environment," CIRANO Working Papers 2006s-29, CIRANO.
2. 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.
   
   • 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.
3. Ricciuti, Roberto, 2008. "Bringing macroeconomics into the lab," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 216-237, March.
   
   • Roberto Ricciuti, 2005. "Bringing Macroeconomics into the Lab," Labsi Experimental Economics Laboratory University of Siena 004, University of Siena.
   • Roberto Ricciuti, 2003. "Bringing Macroeconomics into the Lab," Royal Holloway, University of London: Discussion Papers in Economics 03/9, Department of Economics, Royal Holloway University of London, revised Dec 2003.
   • Roberto Ricciuti, 2004. "Bringing Macroeconomics into the Lab," ICER Working Papers 26-2004, ICER - International Centre for Economic Research.
4. Noussair, C.N. & Pfajfar, D. & Zsiros, J., 2011. "Frictions, Persistence, and Central Bank Policy in an Experimental Dynamic Stochastic General Equilibrium Economy," Discussion Paper 2011-030, Tilburg University, Center for Economic Research.
5. 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.
6. Robert Amano & Jim Engle-Warnick & Malik Shukayev, 2011. "Price-Level Targeting and Inflation Expectations: Experimental Evidence," Working Papers 11-18, Bank of Canada.

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