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," Review of Economic Studies, Oxford University Press, 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. Klaus Adam, 2002. "Adaptive Learning and Cyclical Behavior of Output and Inflation," Macroeconomics 0211013, EconWPA.
    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)

    More about this item

    Keywords

    Experiments; Equilibrium Selection; Restricted Perceptions Equilibrium; Univariate Forecast Functions;

    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.

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

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.