Expectations and Monetary Policy: Experimental Evidence
AbstractThe effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, monetary policy is quite potent in providing stabilization, reducing roughly a half of macroeconomic variance.te potent in providing stabilization, reducing roughly a half of macroeconomic variance.
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Bibliographic InfoPaper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp13-09.
Date of creation: Sep 2013
Date of revision:
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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Other versions of this item:
- Oleksiy Kryvtsov & Luba Petersen, 2013. "Expectations and Monetary Policy: Experimental Evidence," Working Papers 13-44, Bank of Canada.
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-05 (All new papers)
- NEP-CBA-2013-10-05 (Central Banking)
- NEP-EXP-2013-10-05 (Experimental Economics)
- NEP-MAC-2013-10-05 (Macroeconomics)
- NEP-MON-2013-10-05 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The experimental macroeconomics of monetary policy
by Economic Logician in Economic Logic on 2013-11-05 16:44:00
- Guidon Fenig & Mariya Mileva & Luba Petersen, 2013. "Asset Trading and Monetary Policy in Production Economies," Discussion Papers dp13-08, Department of Economics, Simon Fraser University.
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