Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152926
Authors: 
Adam, Klaus
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 492
Abstract: 
This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behavior emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behavior of output and inflation.
Subjects: 
Experiments
Output and Inflation Dynamics
Rational Expectations
Restricted Perceptions Equilibrium
JEL: 
E32
E37
C91
Document Type: 
Working Paper

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