Why do monetary policies matter? : An experimental study of saving and inflation in an overlapping generations model

Bernasconi, Michele ; Kirchkamp, Oliver

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URL: http://ub-madoc.bib.uni-mannheim.de/2865
URN: urn:nbn:de:bsz:180-madoc-28659
Document Type: Working paper
Year of publication: 1998
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: E52 E31 E21 C92 ,
Subject headings (SWD): Geldpolitik , Mehrgenerationenmodell , Inflation , Sparen , Adaptive Erwartung , Lernen
Keywords (English): OLG-model , expectations , inflation , stability , monetary policy , experiments
Abstract: 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 expectation forming 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 different volatility of inflation in the experiment. This may generate important policy trade-offs between monetary regimes. We discuss our findings and relate them to current research on adaptive learning and the role it may have in ranking alternative monetary policies.
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