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Experimental evidence on the persistence of output and inflation

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  • Adam, Klaus

Abstract

This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behavior 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 behavior of output and inflation. JEL Classification: E32, E37, C91

Suggested Citation

  • Adam, Klaus, 2005. "Experimental evidence on the persistence of output and inflation," Working Paper Series 492, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2005492
    Note: 321199
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp492.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Experiments; Output and Inflation Dynamics; rational expectations; Restricted Perceptions Equilibrium;
    All these keywords.

    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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