Why monetary policy matters --- An experimental study of saving, inflation and monetary policies in an overlapping generations model
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 formation of expectations 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 volatility of inflation in the experiment.
|Date of creation:||23 Nov 1998|
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|Note:||We thank Italian CNR and MURST and the German DFG (through SFB 504 at the University of Mannheim) for funding the project. The project started when both authors were Jean Monnet Fellows at the European University Institute (Florence) where some of the experiments described in this paper were conducted. We thank the Institute for its hospitality and for the assistance in running the experiments. We thank Martin Hellwig, Ramon Marimon, Amy Verdun, Simon Hug, and several seminar participants for helpful discussions.|
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