Frictions in an Experimental Dynamic Stochastic General Equilibrium Economy

We construct experimental economies, populated with human subjects, with different institutional features that have a structure and incentives similar to a dynamic stochastic general equilibrium model. An experimental economy with monopolistic competition and no menu costs generates empirical patter...

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Published inJournal of money, credit and banking Vol. 53; no. 2-3; pp. 555 - 587
Main Authors Noussair, Charles N., Pfajfar, Damjan, Zsiros, Janos
Format Journal Article
LanguageEnglish
Published Columbus Wiley Subscription Services, Inc 01.03.2021
Ohio State University Press
Subjects
Analysis
Banks (Finance)
DSGE economy
Economic aspects
Economic conditions
Equilibrium
frictions
Inflation
laboratory experiments
Macroeconomics
menu costs
Monopolistic competition
Research subjects
Stochastic models
Volatility
Welfare
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Summary:We construct experimental economies, populated with human subjects, with different institutional features that have a structure and incentives similar to a dynamic stochastic general equilibrium model. An experimental economy with monopolistic competition and no menu costs generates empirical patterns that are closer to the U.S. economy than simulations or the other experimental environments. We observe greater welfare and output in a setting where goods are perfect substitutes compared to treatments with monopolistic competition. Discretionary human central bankers produce lower output and welfare compared to an automated instrumental rule. Menu costs reduce inflation volatility.
Bibliography:We would like to thank John Duffy, Shyam Sunder, Oleg Korenok, Steffan Ball, Ricardo Nunes, Michiel De Pooter, Wolfgang Luhan, and participants at the Federal Reserve Board, the University of Innsbruck, the first and second LeeX International Conference on Theoretical and Experimental Macroeconomics (Barcelona), the 2011 Computational Economics and Finance Conference (San Francisco), the 2011 Midwest Macro Meetings (Nashville), the 2011 SEA Meetings (Washington), the DSGE and Beyond Conference at the National Bank of Poland (Warsaw), the 2010 North American ESA Meetings (Tucson), the WISE International Workshop on Experimental Economics and Finance (Xiamen), the fifth Nordic Conference on Behavioral and Experimental Economics (Helsinki), and the 2010 International ESA Meetings (Copenhagen) for their comments. We are grateful to Blaž Žakelj for his help with programming. The views expressed herein are our own and do not necessarily reflect those of Analysis Group, the Federal Reserve Board, or Federal Reserve System.
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ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12791