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On the role of heuristics: Experimental evidence on inflation dynamics

  • Graf Lambsdorff, Johann
  • Schubert, Manuel
  • Giamattei, Marcus

We carry out an experiment on a macroeconomic price setting game where prices are complements. Despite relevant information being common knowledge and price flexibility we observe significant deviation from equilibrium prices and history dependence. In a first treatment we observe that equilibrium values were obtained in the long run but at the cost of a very slow adjustment and thus history dependence. By reporting a business indicator in a simpler form, subjects were given the chance to coordinate their prices by help of a heuristic in a second treatment. This option was widely taken, bringing about excess volatility and a deviation from equilibrium even in the long run. In a third treatment with staggered pricing we observe, contrary to theoretical predictions, the one-round ahead (publicly known) shock is significant, but future inflation is not. Our findings cast light on price dynamics when subjects have limited computational capacities.

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Paper provided by University of Passau, Faculty of Business and Economics in its series Passauer Diskussionspapiere, Volkswirtschaftliche Reihe with number V-63-11.

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Date of creation: 2011
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Handle: RePEc:zbw:upadvr:v6311
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