Here.
Experimental work in monetary economics is usually based on theory that incorporates an infinite horizon. Yet, hard constraints on laboratory sessions lead to finite times when the game must (with probability 1) end, and then simple backward induction implies monetary equilibria cannot exist. Hence, these experiments cannot evaluate subjects’ ability to settle on the use of money as a medium of exchange, that ameliorates trading frictions, as an equilibrium outcome. To address this, we present some finite-horizon games where monetary exchange is an equilibrium outcome, and report some experimental results using these games.
From:
Douglas Davis Virginia Commonwealth University
Oleg Korenok Virginia Commonwealth University
Peter Norman University of North Carolina
Bruno Sultanum Federal Reserve Bank of Richmond
Randall Wright UW Madison, FRB Minneapolis, FRB Chicago, and NBER
Experimental work in monetary economics is usually based on theory that incorporates an infinite horizon. Yet, hard constraints on laboratory sessions lead to finite times when the game must (with probability 1) end, and then simple backward induction implies monetary equilibria cannot exist. Hence, these experiments cannot evaluate subjects’ ability to settle on the use of money as a medium of exchange, that ameliorates trading frictions, as an equilibrium outcome. To address this, we present some finite-horizon games where monetary exchange is an equilibrium outcome, and report some experimental results using these games.
From:
Douglas Davis Virginia Commonwealth University
Oleg Korenok Virginia Commonwealth University
Peter Norman University of North Carolina
Bruno Sultanum Federal Reserve Bank of Richmond
Randall Wright UW Madison, FRB Minneapolis, FRB Chicago, and NBER