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Experimental Evidence on the Persistence of Output and Inflation

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  • Klaus Adam

Abstract

This article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. Rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. This 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 behaviour of output and inflation. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Suggested Citation

  • Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, April.
    • Handle: RePEc:ecj:econjl:v:117:y:2007:i:520:p:603-636
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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • 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: Models and Applications

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