IDEAS home Printed from https://ideas.repec.org/p/sce/scecf4/338.html
   My bibliography  Save this paper

Should macroeconomists consider restricted perception equilibria? Evidence from the experimental laboratory

Author

Listed:
  • Klaus Adam

Abstract

Abstract: This paper studies a simple model of output and inflation in the experimental laboratory. While the Rational Expectations Equilibrium (REE)predicts output and inflation to be white noise processes, output and inflation in experimental sessions display stable cyclical patterns. For about 50 model periods agents' expectations, which are the sole source of these patterns, are described extremely well by a Restricted Perceptions Equilibrium (RPE). In this equilibrium agents use the univariate forecast function which generates the lowest mean squared forecast error at the 1-step forecast horizon and iterate these forecasts to derive multi-step predictions. After about 50 model periods agents seem to learn that their simple univariate forecast function is misspecified and start to employ different forecast models for different prediction horizons. The data suggests that the new models are again optimal univariate forecast functions and evidence in favor of convergence towards the REE remains weak, even after more than 100 model periods. However, for model parameterizations where an RPE does not exist, agents' expectations are captured relatively well by the REE.

Suggested Citation

  • Klaus Adam, 2004. "Should macroeconomists consider restricted perception equilibria? Evidence from the experimental laboratory," Computing in Economics and Finance 2004 338, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:338
    as

    Download full text from publisher

    File URL: http://repec.org/sce2004/up.26816.1081414183.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert M. Anderson & Hugo Sonnenschein, 1985. "Rational Expectations Equilibrium with Econometric Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 359-369.
    2. Evans, George W. & Ramey, Garey, 2006. "Adaptive expectations, underparameterization and the Lucas critique," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 249-264, March.
    3. Adam, K., 2000. "Adaptive Learning and the Cyclical Behavior of Output and Inflation," Economics Working Papers eco2000/25, European University Institute.
    4. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-1107, September.
    5. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-224, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 887-907.
    2. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, April.
    3. Bao, Te & Duffy, John, 2016. "Adaptive versus eductive learning: Theory and evidence," European Economic Review, Elsevier, vol. 83(C), pages 64-89.
    4. Branch, William A. & Evans, George W., 2006. "Intrinsic heterogeneity in expectation formation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 264-295, March.
    5. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2009. "Anticipated fiscal policy and adaptive learning," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 930-953, October.
    6. William Branch & George W. Evans, 2007. "Model Uncertainty and Endogenous Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 207-237, April.
    7. Shea, Paul, 2015. "Red herrings and revelations: does learning about a new variable worsen forecasts?," Economic Modelling, Elsevier, vol. 49(C), pages 395-406.
    8. Brock, William A. & de Fontnouvelle, Patrick, 2000. "Expectational diversity in monetary economies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 725-759, June.
    9. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2009. "Anticipated fiscal policy and adaptive learning," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 930-953, October.
    10. Evans, George & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Bank of Finland Research Discussion Papers 8/2011, Bank of Finland.
    11. Atanas Christev, 2006. "Learning Hyperinflations," Computing in Economics and Finance 2006 475, Society for Computational Economics.
    12. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    13. Burton, Diana M. & Love, H. Alan, 1996. "A Review of Alternative Expectations Regimes in Commodity Markets: Specification, Estimation, and Hypothesis Testing Using Structural Models," Agricultural and Resource Economics Review, Cambridge University Press, vol. 25(2), pages 213-231, October.
    14. Sergeyev, Dmitriy & Iovino, Luigi, 2018. "Central Bank Balance Sheet Policies Without Rational Expectations," CEPR Discussion Papers 13100, C.E.P.R. Discussion Papers.
    15. Camille Cornand & Frank Heinemann, 2015. "Macro-expérimentation autour des fonctions des banques centrales," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 3-47.
    16. Fatemeh Mokhtarzadeh & Luba Petersen, 2021. "Coordinating expectations through central bank projections," Experimental Economics, Springer;Economic Science Association, vol. 24(3), pages 883-918, September.
    17. Kevin Lansing, 2009. "Time Varying U.S. Inflation Dynamics and the New Keynesian Phillips Curve," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 304-326, April.
    18. Kelly, David L. & Shorish, Jamsheed, 2000. "Stability of Functional Rational Expectations Equilibria," Journal of Economic Theory, Elsevier, vol. 95(2), pages 215-250, December.
    19. Zhengyuan Gao & Christian M. Hafner, 2019. "Looking Backward and Looking Forward," Econometrics, MDPI, vol. 7(2), pages 1-24, June.
    20. Antonio Cabrales & Michalis Drouvelis & Zeynep Gurguy & Indrajit Ray, 2017. "Transparency is Overrated: Communicating in a Coordination Game with Private Information," CESifo Working Paper Series 6781, CESifo.
    21. William A. Brock & Cars H. Hommes, 2001. "A Rational Route to Randomness," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 16, pages 402-438, Edward Elgar Publishing.

    More about this item

    Keywords

    Experiments; Equilibrium Selection; Restricted Perceptions Equilibrium; Univariate Forecast Functions;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:338. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/sceeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.