Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2023-05-12
Number: 23-028/VI
Author-Name: Jasmina Arifovic
Author-Workplace-Name: Simon Fraser University
Author-Name: Isabelle Salle
Author-Workplace-Name: University of Ottawa
Author-Name: Hung Truong
Author-Workplace-Name: Simon Fraser University
Title: History-Dependent Monetary Regimes: A Lab Experiment and a Henk Model
Abstract: Price-level targeting (PLT) is optimal under the fully-informed rational
expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a
laboratory group experiment – where expectations are elicited from human
subjects – to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with
both deflationary and cost-push shocks. We then emulate the subjects’ expectations with a micro-founded heterogeneous-expectation New Keynesian
(HENK) model and reproduce the macroeconomic dynamics observed in the
lab. Both in the lab and in the HENK model, the benefits of PLT over an IT
regime obtained under the FIRE assumption are not observed: both human
subjects and HENK agents are unable to learn the underlying implications of
PLT, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance from the CB consistent with closing the
price gap, the stabilizing benefits of PLT materialize both in the lab and in the
model.
Classification-JEL: E7, E52, E42, C92
Keywords: heterogeneous expectations, learning, central bank communication, lab experiments
File-URL: https://papers.tinbergen.nl/23028.pdf
File-Format: application/pdf
File-Size: 1.359.945 bytes
Handle: RePEc:tin:wpaper:20230028