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Experimental Macroeconomics: Expectations and Monetary Policy Design

Experimental Macroeconomics: Expectations and Monetary Policy Design

Objective

The objective of this proposal is to address three issues in the hart of the debate in modern macroeconomics, and in particular in monetary economics. All these issues will be analyzed with a new and innovative research methodology within this field: laboratory experiments. This field has a lot of potential to address some of questions regarding monetary policy design as we abstract from the influence of exogenous factors and thus it is quite straightforward to analyze properties of the standard macroeconomic model under different expectation formation processes. The first two issues are concerned with the design of monetary policy: first to establish the relationship between monetary policy and expectation formation mechanism and second to investigate what is the optimal level of transparency and central bank communication strategy to stabilize inflation and output. We search for the design of monetary policy that would perform best in a controlled environment when subject are asked to forecast inflation and output. In order that this can be achieved inflation expectations should be well anchored. It is expected that several designs proposed in the literature will not prevent the emergence of expectations driven cycles. A third issue that will be addressed in this proposal is to put the standard sticky-price New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to the test in the laboratory. Using subjects’ inputs and decisions in a simplified fictitious economy with households, firms, and policy makers, we will derive the main macroeconomics aggregates and compare their evolution and their reactions to monetary policy changes with the theoretical predictions from the DSGE models and actual observed stylized facts. The final objective of this project is the dissemination of results and organization of an academic conference on the proposed topic.
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Coordinator

STICHTING KATHOLIEKE UNIVERSITEIT BRABANT

Address

Warandelaan 2
5037 Ab Tilburg

Netherlands

Activity type

Higher or Secondary Education Establishments

EU Contribution

€ 161 248,80

Administrative Contact

Lisette Ligtenberg (Ms.)

Project information

Grant agreement ID: 254956

Status

Closed project

  • Start date

    1 May 2010

  • End date

    30 April 2012

Funded under:

FP7-PEOPLE

  • Overall budget:

    € 161 248,80

  • EU contribution

    € 161 248,80

Coordinated by:

STICHTING KATHOLIEKE UNIVERSITEIT BRABANT

Netherlands