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Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model

  • Bernasconi, Michele
  • Kirchkamp, Oliver

We study experiments of an overlapping generations model where inflation is determined by the monetary policy and by the amount of average saving within each period. We use a new experimental setup that allows us to observe more details of the process of expectation forming and separate this process from the actual saving process. In contrast to experimental findings by Lim, Prescott, Sunder; Marimon, Spear, Sunder; and Marimon, Sunder we find that (1) agents do not form first-order adaptive expectations; (2) subjects ‘over-save’ for precautionary reasons; as a result (3) the so-called Friedman conjecture holds, i.e. monetary policies which are equivalent in static equilibrium exhibit different levels and different volatility of inflation in the experiment. This may generate important policy trade-offs between monetary regimes. We discuss our findings and relate them to current research on adaptive learning and the role it may have in ranking alternative monetary policies.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 46 (2000)
Issue (Month): 2 (October)
Pages: 315-343

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Handle: RePEc:eee:moneco:v:46:y:2000:i:2:p:315-343
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Evans, George W. & Honkapohja, Seppo & Marimon, Ramon, 1996. "Convergence in Monetary Inflation Models with Heterogeneous Learning Rules," CEPR Discussion Papers 1310, C.E.P.R. Discussion Papers.
  2. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier.
  3. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  4. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-107, September.
  5. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  6. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
  7. Marimon, R. & Sunder, S., 1993. "Expectations and Learning under Alternative Monetary Regimes: An Experimental Approach," Papers 189, Cambridge - Risk, Information & Quantity Signals.
  8. Michael Bruno & Stanley Fischer, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 353-374.
  9. Marimon, R. & Sunder, S., 1995. "Does a Constant Money Growth Rule Help Stabilize Inflation?: Experimental Evidence," GSIA Working Papers 1995-04, Carnegie Mellon University, Tepper School of Business.
  10. Honkapohja, Seppo, 1995. "Bounded rationality in macroeconomics A review essay," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 509-518, June.
  11. Lim, Suk S & Prescott, Edward C & Sunder, Shyam, 1994. "Stationary Solution to the Overlapping Generations Model of Fiat Money: Experimental Evidence," Empirical Economics, Springer, vol. 19(2), pages 255-77.
  12. Sugden, Robert, 1995. "A Theory of Focal Points," Economic Journal, Royal Economic Society, vol. 105(430), pages 533-50, May.
  13. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 169-84, May.
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