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On the role of heuristics—Experimental evidence on inflation dynamics

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  • Lambsdorff, Johann Graf
  • Schubert, Manuel
  • Giamattei, Marcus

Abstract

We run an experiment where groups of six subjects must set prices in a non-stationary macroeconomic environment, where prices are complements. The exogenous variable, a business indicator, is common knowledge and prices are flexible, disregarding sticky prices or sticky information. In a first treatment subjects insignificantly corrected for past errors, which implies that history plays a role for determining current prices. By reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices. This option was widely taken, bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead, contrary to theoretical predictions. Our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning, the failure or unwillingness to iteratively delete dominated strategies.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:dyncon:v:37:y:2013:i:6:p:1213-1229
    DOI: 10.1016/j.jedc.2013.02.007
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    Cited by:

    1. Giamattei, Marcus, 2015. "Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    2. Marcus Giamattei & Johann Lambsdorff, 2015. "Balancing the current account: experimental evidence on underconsumption," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 670-696, December.
    3. repec:eee:matsoc:v:90:y:2017:i:c:p:191-207 is not listed on IDEAS
    4. Nagel, Rosemarie & Bühren, Christoph & Frank, Björn, 2017. "Inspired and inspiring: Hervé Moulin and the discovery of the beauty contest game," Mathematical Social Sciences, Elsevier, vol. 90(C), pages 191-207.

    More about this item

    Keywords

    Inflation persistence; Staggered prices; Sticky reasoning; New Keynesian Phillips curve;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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