Here.
While experimental methods are widespread in microeconomics, they are less common in macroeconomics and finance. Experimental methods, however, have important advantages also in these fields. Specifically,
during the recent decades, monetary models have been built on explicit micro foundations leading to well-founded laboratory implementations.
Sponsored by the Interdisciplinary Center of Economic Science at George Mason University and the Journal of Economic Behavior & Organization
The Interdisciplinary Center for Economic Science (ICES) at George Mason University will host the inaugural conference on Theory and Experiments in Monetary Economics (TEME). Organized by Daniel Houser, Cesar Martinelli and Daniela Puzzello, the TEME conference is sponsored in part by Journal of Economic Behavior & Organization (JEBO), which will also publish a special issue focused on “Theoretical and Experimental Monetary Economics.” In order to encourage the exchange of ideas among participants, the conference will include three keynote addresses and a dozen plenary sessions spread over two days. The purpose of the conference and special issue is to provide a forum to discuss frontier research related to the use of experimental methods in exploring and developing monetary theory and macroeconomic monetary policy.
TEME CONFERENCE 2018
Theory and Experiments in Monetary Economics
DAY 1: Friday, October 5th, 2018
8:00 – 8:30 am
Breakfast
8:30 – 8:40 am
CHSS Dean Daniel Houser Daniela Puzzello
Opening remarks
8:45 – 9:45 am
John Duffy
Keynote address 1: “Experimental Evidence on Monetary Policies”
9:45 – 10:30 am
Janet Jiang
“Adoption of a New Payment Method: Theory and Experimental Evidence”
10:30 – 11:15 am
Justin Rietz
“Secondary Currency Acceptance: Experimental Evidence with a Dual Currency Search Model”
11:15 – 11:30 am
Break 1
11:30 – 12:15 pm
Shyam Sunder
“Speculation, Price Indeterminacy and Money Supply in Financial Markets: An Experimental Study”
12:15 – 1:00 pm
Frank Heinemann
“Active monetary policy turns prices into strategic substitutes”
1:00 – 2:00 pm
Lunch
2:00 – 2:45 pm
Cary Deck
“Experiments with Rationally Inattentive Consumers”
2:45 – 3:30 pm
Rosemarie Nagel
“The Keynesian Beauty Contest: An Economic System, the Mind, and the Brain”
3:30 – 4:00 pm
Break 2
4:00 – 4:45 pm
Cathy Zhang
“Money and Inflation in the Laboratory”
4:45 – 5:45 pm
Randall Wright
Keynote address 2: “Playing with Money”
5:45 – 6:45 pm
Reception
DAY 2: Saturday, October 6th, 2018
8:30 – 9:00 am
Breakfast
9:00 – 10:00 am
Alejandro Werner
Keynote address 3
10:00 – 10:45 am
Gabriele Camera
“Do Economic Inequalities Affect Long-Run Cooperation & Prosperity?”
10:45 – 11:15 am
Break 1
11:15 – 12:00 pm
Charles Noussair
“Contagion and return predictability in asset markets: An experimental assessment of the ‘Two trees’ model”
12:00 – 12:45 pm
Marco Cipriani
“Default and Endogenous Leverage in the Laboratory”
12:45 – 1:45 pm
Lunch
1:45 – 2:30 pm
Jasmina Arifovic
“Evolution of sunspot like behavior in a model of bank runs: experimental evidence and learning”
2:30 – 3:15 pm
Douglas Davis
“Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation”
3:15 – 4:00 pm
Te Bao
“The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets”
KEYNOTE SPEAKERS
John DuffyJohn Duffy earned an A.B. in Economics from the University of California, Berkeley in 1986 and a Ph.D. in Economics from the University of California, Los Angeles in 1992. From 1992-2014 he was Professor of Economics at the University of Pittsburgh. Since 2014, he is Professor of Economics at the University of California, Irvine (UCI). John's research interests are in behavioral and experimental economics, game theory, finance and macroeconomics. He is Co-Editor of the journal Experimental Economics and Co-Director of UCI's Experimental Social Science Laboratory (ESSL).
Alejandro WernerAlejandro Werner assumed his current position as Director of the Western Hemisphere Department of the International Monetary Fund (IMF) in January 2013. A Mexican citizen, Mr. Werner has had distinguished careers in the public and private sectors as well as in academia. He served as Undersecretary of Finance and Public Credit of Mexico (December 2006–August 2010) and Head of Corporate and Investment Banking at BBVA-Bancomer (August 2011 until end-2012). Previously, he was Director of Economic Studies at the Bank of Mexico and Professor at ITAM, Instituto de Empresa, and Yale University. He has published widely. Mr. Werner was named Young Global Leader by the World Economic Forum in 2007. Mr. Werner received his Ph.D. from the Massachusetts Institute of Technology in 1994.
Randall WrightRandall Wright is the Ray Zemon Professor of Liquid Assets in the Department of Finance, Investment and Banking at the Wisconsin School of Business, as well as a Professor in Wisconsin’s Department of Economics. He previously held faculty positions at the University of Pennsylvania and Cornell, and was a National Fellow at Stanford’s Hoover Institution. He is currently also a consultant for the Federal Reserve Banks of Minneapolis and Chicago, and a Research Associate at the National Bureau of Economic Research, where he co-organizes the Macro Perspectives group. He is also a Fellow of the Econometric Society, the Society for the Advancement of Economic Theory, and the Society for Economic Measurement. He has a B.A. (Economics) from University of Manitoba, a Ph.D. (Economics) from University of Minnesota, and an M.A. (Honorary) from University of Pennsylvania.
Abstracts
John Duffy: “Experimental Evidence on Monetary Policies”We explore the celebrated Friedman rule for monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a very wide variety of different monetary models, including the Lagos-Wright model.
However, we are not aware of any prior empirical evidence evaluating the welfare consequences of this rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the behavioral implications of these two theoretically equivalent implementations of the Friedman Rule and compare them with two other policy regimes, a constant money supply regime and another regime advocated by Friedman where the supply of money grows at a constant k-percent rate.
Janet Jiang: “Adoption of a New Payment Method: Theory and Experimental Evidence”We model the introduction of a new payment method, e.g., e-money, that competes with an existing payment method, e.g., cash. The new payment method involves relatively lower per-transaction costs for both buyers and sellers, but sellers must pay a fixed fee to accept the new payment method. As a result of the network effects, our model admits two symmetric pure strategy Nash equilibria. In one equilibrium, the new payment method is not adopted and all transactions continue to be carried out using the existing payment method. In the other equilibrium, the new payment method is adopted and completely replaces the existing payment method. The equilibrium involving only the new payment method is socially optimal as it minimizes total transaction costs. Using this model, we study the question of equilibrium selection by conducting a laboratory experiment. We find that, depending on the fixed fee charged for the adoption of the new payment method and on the choices made by participants on both sides of the market, either equilibrium can be selected. More precisely, a lower fixed fee for sellers favors very quick adoption of the new payment method by all participants, while for a sufficiently high fee, sellers gradually learn to refuse to accept the new payment method and transactions are largely conducted using the existing payment method. We also find that an evolutionary learning model captures the dynamics of the experimental data well.
Justin Rietz: “Secondary Currency Acceptance: Experimental Evidence with a Dual Currency Search Model”Motivated by the growing acceptance of electronic cryptocurrencies such as Bitcoin, I examine in a controlled, experimental laboratory setting, the acceptance of a secondary currency when a primary currency already circulates in an economy. The underlying model is an indivisible goods / indivisible money, dual currency search model similar to that in Kiyotaki and Wright (1993) and Craig and Waller (2000). In such models, there are two pure Nash equilibria - total acceptance or total rejection of the secondary currency - and one unstable, mixed equilibrium denoted as partial acceptance. This mixed equilibrium is considered an artifact of the indivisibility of money and goods in the model and is often ignored. I find that when barter between good holders is allowed, the equilibrium tends towards total rejection. Conversely, when barter is prohibited, the equilibrium tends towards total
acceptance. However, in both cases, the economies as a whole display partial acceptance of the secondary currency.
Shyam Sunder: “Speculation, Price Indeterminacy and Money Supply in Financial Markets: An Experimental Study”To explore how speculative trading influences prices in financial markets we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) as well as dividend collecting investors. We find that in markets with only speculating investors (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) the “mispricing” is likely to be strategic and not irrational; (iv) mispricing increases with the number of transfers until maturity; and (v) speculative trading pushes prices upward (downward) when supply of money is high (low). The results suggest that control of money supply can be used to stabilize asset prices.
Frank Heinemann: “Active monetary policy turns prices into strategic substitutes”Monetary policy affects the degree of strategic complementarity in firms’ pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms’ pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. We discuss the consequences for dynamic adjustment processes in the light of results on learning-to-forecast experiments and derive some policy implications.
Cary Deck: “Experiments with Rationally Inattentive Consumers”This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about it. The informativeness of the signals directly relates to the cognitive effort required to process the information. We find that subjects’ behavior is largely in line with the predictions of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes in the economic environment by varying their attention and consumption; 3) They respond asymmetrically to positive and negative shocks to income, with negative shocks triggering stronger and faster reactions than positive shocks.
Rosemarie Nagel: “The Keynesian Beauty Contest: An Economic System, the Mind, and the Brain”This paper discusses the newest developments of behavioral and experimental macroeconomics within the framework of the Keynesian Beauty contest and the so-called level-k model. It consists of three parts: Firstly, we present a structure of archetypal economic models through a generalization of the Keynesian Beauty Contest (Mauersberger, Nagel (2018)). Secondly, we discuss a newly emerging literature in behavioral macroeconomic theory, which has implemented bounded
rationality through level-k modeling, derived from behavioral microeconomics and experiments. Thirdly, we report on some Beauty Contest experiments from the economic and neuroscience laboratory and the field with a focus on macroeconomic questions. We also include an experiment with participants of several conferences.
Cathy Zhang: “Money and Inflation in the Laboratory”We integrate theory and experiments to compare the effect of two alternative inflationary monetary policies on economic outcomes. The framework of our experiment is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We consider three treatments in this economy: a baseline policy with a fixed money supply and two inflationary monetary policies where the government fixes the growth rate of the money supply. In the first implementation (Active Government Spending), the government adjusts expenditures financed through seigniorage to achieve a target money growth rate while in the second implementation (Lump Sum Transfers), the government injects new money through lump-sum transfers to some individuals. Although the theory implies these two policies render the same stationary equilibrium where inflation is constant at the money growth rate, the experimental economies exhibit important differences in terms of the level and volatility of inflation, velocity, output and welfare.
Randall Wright: “Playing with Money”Experimental studies in monetary economics usually study infinite horizon models. Yet, laboratory sessions are conducted in finite time blocks, at the conclusion of which the sessions terminate with certainty. Finite lab sessions problematically create finite horizons which imply that monetary equilibria cannot exist, even if the actual stopping point is random. It is therefore unclear whether these experiments evaluate subjects’ use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand subgame-perfection or backward induction, or features of games that promote the use of money behaviorally, even when doing so is not an equilibrium strategy. To address this issue we present a pair of finite-horizon games where monetary exchange is an equilibrium, and report an experiment that evaluates behavior in these games in light of a finitely repeated alternative where monetary exchange is not an equilibrium.
Gabriele Camera: “Do Economic Inequalities Affect Long-Run Cooperation & Prosperity?”Issues of fairness and inequality are largely unexplored in the literature on cooperation in supergames. We provide experimental evidence that these issues affect conduct, driving subjects away from efficient play. Groups of participants faced an uncertain number of helping games each time in a random pair where a coin flip determined who could help whom. This provided exogenous variation in past opportunities, while ensuring equality of future opportunities. Full cooperation is efficient and an equilibrium. Standard theory suggests that variation in past opportunities should not affect the incentive structure, hence behavior should not respond to it. Empirically, that variation affected individual conduct and coordination on efficient play. Participants conditioned choices on own past opportunities and, with inequalities made visible, discriminated against those who were better-off.
Charles Noussair: “Contagion and return predictability in asset markets: An experimental assessment of the ‘Two trees’ model”We investigate, with a laboratory experiment, whether contagion can emerge between two risky assets despite an absence of correlation in their fundamentals. To guide our experimental design, we use the ‘Two-trees’ asset pricing model developed by Cochrane, Longstaff and Santa-Clara (2008) and evaluate some of its predictions regarding time series and cross-sectional returns in response to fundamental value shocks. We observe positive autocorrelation in the shocked asset and positive contemporaneous correlation, as the model predicts. The dividend-price ratio forecasts the returns of the risky assets both in the time series and in the cross section, as predicted by the model. However, negative cross-serial correlation is not observed and there is some unexpected momentum in the non- shocked asset.
Marco Cipriani: “Default and Endogenous Leverage in the Laboratory”We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, we do not rely on ad-hoc leverage constraints, instead, leverage endogenously arises in equilibrium. When financial assets serve as collateral, namely, assets with payoffs that do not depend on ownership (such as bonds), leverage is low and there is no default. In contrast, when non-financial assets serve as collateral, namely, assets with payoffs that depend on ownership (such as firms), leverage is higher and default occurs. In line with these theoretical predictions, leverage and default rates are higher in the treatment with non-financial assets; in contrast to the theory, however, default rates are greater than zero even when assets are financial.
Douglas Davis: “Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation”We develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements. Baseline and liquidity-regulated regimes are analyzed in a simple shockenvironment, which features a single idiosyncratic shock, and in a compound shockenvironment, in which the idiosyncratic shock is followed by a randomly occurring second- stage shock. Interbank trading of the illiquid asset follows each shock. In the simple shock environment, we find that liquidity regulations reduce the incidence of bankruptcies, but at a large loss of investment efficiency. In the compound shock environment, liquidity regulations not only impose a loss of investment efficiency but also fail to reduce bankruptcies.
Te Bao: “The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets”Previous literature in experimental finance finds little support for the effectiveness of interest rate policy in stabilizing asset price bubbles. We run a learning to forecast experiment with an interest rate policy that is strongly responsive to deviation of asset prices from the fundamental. Our result shows that the average price deviation is significantly lower in the treatments with the interest rate policy than in the baseline treatment without the policy. Our result also suggests that the policy is effective irrespective of whether or not the purpose of it is announced/explained to the participants.
While experimental methods are widespread in microeconomics, they are less common in macroeconomics and finance. Experimental methods, however, have important advantages also in these fields. Specifically,
during the recent decades, monetary models have been built on explicit micro foundations leading to well-founded laboratory implementations.
Sponsored by the Interdisciplinary Center of Economic Science at George Mason University and the Journal of Economic Behavior & Organization
The Interdisciplinary Center for Economic Science (ICES) at George Mason University will host the inaugural conference on Theory and Experiments in Monetary Economics (TEME). Organized by Daniel Houser, Cesar Martinelli and Daniela Puzzello, the TEME conference is sponsored in part by Journal of Economic Behavior & Organization (JEBO), which will also publish a special issue focused on “Theoretical and Experimental Monetary Economics.” In order to encourage the exchange of ideas among participants, the conference will include three keynote addresses and a dozen plenary sessions spread over two days. The purpose of the conference and special issue is to provide a forum to discuss frontier research related to the use of experimental methods in exploring and developing monetary theory and macroeconomic monetary policy.
TEME CONFERENCE 2018
Theory and Experiments in Monetary Economics
DAY 1: Friday, October 5th, 2018
8:00 – 8:30 am
Breakfast
8:30 – 8:40 am
CHSS Dean Daniel Houser Daniela Puzzello
Opening remarks
8:45 – 9:45 am
John Duffy
Keynote address 1: “Experimental Evidence on Monetary Policies”
9:45 – 10:30 am
Janet Jiang
“Adoption of a New Payment Method: Theory and Experimental Evidence”
10:30 – 11:15 am
Justin Rietz
“Secondary Currency Acceptance: Experimental Evidence with a Dual Currency Search Model”
11:15 – 11:30 am
Break 1
11:30 – 12:15 pm
Shyam Sunder
“Speculation, Price Indeterminacy and Money Supply in Financial Markets: An Experimental Study”
12:15 – 1:00 pm
Frank Heinemann
“Active monetary policy turns prices into strategic substitutes”
1:00 – 2:00 pm
Lunch
2:00 – 2:45 pm
Cary Deck
“Experiments with Rationally Inattentive Consumers”
2:45 – 3:30 pm
Rosemarie Nagel
“The Keynesian Beauty Contest: An Economic System, the Mind, and the Brain”
3:30 – 4:00 pm
Break 2
4:00 – 4:45 pm
Cathy Zhang
“Money and Inflation in the Laboratory”
4:45 – 5:45 pm
Randall Wright
Keynote address 2: “Playing with Money”
5:45 – 6:45 pm
Reception
DAY 2: Saturday, October 6th, 2018
8:30 – 9:00 am
Breakfast
9:00 – 10:00 am
Alejandro Werner
Keynote address 3
10:00 – 10:45 am
Gabriele Camera
“Do Economic Inequalities Affect Long-Run Cooperation & Prosperity?”
10:45 – 11:15 am
Break 1
11:15 – 12:00 pm
Charles Noussair
“Contagion and return predictability in asset markets: An experimental assessment of the ‘Two trees’ model”
12:00 – 12:45 pm
Marco Cipriani
“Default and Endogenous Leverage in the Laboratory”
12:45 – 1:45 pm
Lunch
1:45 – 2:30 pm
Jasmina Arifovic
“Evolution of sunspot like behavior in a model of bank runs: experimental evidence and learning”
2:30 – 3:15 pm
Douglas Davis
“Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation”
3:15 – 4:00 pm
Te Bao
“The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets”
KEYNOTE SPEAKERS
John DuffyJohn Duffy earned an A.B. in Economics from the University of California, Berkeley in 1986 and a Ph.D. in Economics from the University of California, Los Angeles in 1992. From 1992-2014 he was Professor of Economics at the University of Pittsburgh. Since 2014, he is Professor of Economics at the University of California, Irvine (UCI). John's research interests are in behavioral and experimental economics, game theory, finance and macroeconomics. He is Co-Editor of the journal Experimental Economics and Co-Director of UCI's Experimental Social Science Laboratory (ESSL).
Alejandro WernerAlejandro Werner assumed his current position as Director of the Western Hemisphere Department of the International Monetary Fund (IMF) in January 2013. A Mexican citizen, Mr. Werner has had distinguished careers in the public and private sectors as well as in academia. He served as Undersecretary of Finance and Public Credit of Mexico (December 2006–August 2010) and Head of Corporate and Investment Banking at BBVA-Bancomer (August 2011 until end-2012). Previously, he was Director of Economic Studies at the Bank of Mexico and Professor at ITAM, Instituto de Empresa, and Yale University. He has published widely. Mr. Werner was named Young Global Leader by the World Economic Forum in 2007. Mr. Werner received his Ph.D. from the Massachusetts Institute of Technology in 1994.
Randall WrightRandall Wright is the Ray Zemon Professor of Liquid Assets in the Department of Finance, Investment and Banking at the Wisconsin School of Business, as well as a Professor in Wisconsin’s Department of Economics. He previously held faculty positions at the University of Pennsylvania and Cornell, and was a National Fellow at Stanford’s Hoover Institution. He is currently also a consultant for the Federal Reserve Banks of Minneapolis and Chicago, and a Research Associate at the National Bureau of Economic Research, where he co-organizes the Macro Perspectives group. He is also a Fellow of the Econometric Society, the Society for the Advancement of Economic Theory, and the Society for Economic Measurement. He has a B.A. (Economics) from University of Manitoba, a Ph.D. (Economics) from University of Minnesota, and an M.A. (Honorary) from University of Pennsylvania.
Abstracts
John Duffy: “Experimental Evidence on Monetary Policies”We explore the celebrated Friedman rule for monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a very wide variety of different monetary models, including the Lagos-Wright model.
However, we are not aware of any prior empirical evidence evaluating the welfare consequences of this rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the behavioral implications of these two theoretically equivalent implementations of the Friedman Rule and compare them with two other policy regimes, a constant money supply regime and another regime advocated by Friedman where the supply of money grows at a constant k-percent rate.
Janet Jiang: “Adoption of a New Payment Method: Theory and Experimental Evidence”We model the introduction of a new payment method, e.g., e-money, that competes with an existing payment method, e.g., cash. The new payment method involves relatively lower per-transaction costs for both buyers and sellers, but sellers must pay a fixed fee to accept the new payment method. As a result of the network effects, our model admits two symmetric pure strategy Nash equilibria. In one equilibrium, the new payment method is not adopted and all transactions continue to be carried out using the existing payment method. In the other equilibrium, the new payment method is adopted and completely replaces the existing payment method. The equilibrium involving only the new payment method is socially optimal as it minimizes total transaction costs. Using this model, we study the question of equilibrium selection by conducting a laboratory experiment. We find that, depending on the fixed fee charged for the adoption of the new payment method and on the choices made by participants on both sides of the market, either equilibrium can be selected. More precisely, a lower fixed fee for sellers favors very quick adoption of the new payment method by all participants, while for a sufficiently high fee, sellers gradually learn to refuse to accept the new payment method and transactions are largely conducted using the existing payment method. We also find that an evolutionary learning model captures the dynamics of the experimental data well.
Justin Rietz: “Secondary Currency Acceptance: Experimental Evidence with a Dual Currency Search Model”Motivated by the growing acceptance of electronic cryptocurrencies such as Bitcoin, I examine in a controlled, experimental laboratory setting, the acceptance of a secondary currency when a primary currency already circulates in an economy. The underlying model is an indivisible goods / indivisible money, dual currency search model similar to that in Kiyotaki and Wright (1993) and Craig and Waller (2000). In such models, there are two pure Nash equilibria - total acceptance or total rejection of the secondary currency - and one unstable, mixed equilibrium denoted as partial acceptance. This mixed equilibrium is considered an artifact of the indivisibility of money and goods in the model and is often ignored. I find that when barter between good holders is allowed, the equilibrium tends towards total rejection. Conversely, when barter is prohibited, the equilibrium tends towards total
acceptance. However, in both cases, the economies as a whole display partial acceptance of the secondary currency.
Shyam Sunder: “Speculation, Price Indeterminacy and Money Supply in Financial Markets: An Experimental Study”To explore how speculative trading influences prices in financial markets we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) as well as dividend collecting investors. We find that in markets with only speculating investors (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) the “mispricing” is likely to be strategic and not irrational; (iv) mispricing increases with the number of transfers until maturity; and (v) speculative trading pushes prices upward (downward) when supply of money is high (low). The results suggest that control of money supply can be used to stabilize asset prices.
Frank Heinemann: “Active monetary policy turns prices into strategic substitutes”Monetary policy affects the degree of strategic complementarity in firms’ pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms’ pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. We discuss the consequences for dynamic adjustment processes in the light of results on learning-to-forecast experiments and derive some policy implications.
Cary Deck: “Experiments with Rationally Inattentive Consumers”This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about it. The informativeness of the signals directly relates to the cognitive effort required to process the information. We find that subjects’ behavior is largely in line with the predictions of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes in the economic environment by varying their attention and consumption; 3) They respond asymmetrically to positive and negative shocks to income, with negative shocks triggering stronger and faster reactions than positive shocks.
Rosemarie Nagel: “The Keynesian Beauty Contest: An Economic System, the Mind, and the Brain”This paper discusses the newest developments of behavioral and experimental macroeconomics within the framework of the Keynesian Beauty contest and the so-called level-k model. It consists of three parts: Firstly, we present a structure of archetypal economic models through a generalization of the Keynesian Beauty Contest (Mauersberger, Nagel (2018)). Secondly, we discuss a newly emerging literature in behavioral macroeconomic theory, which has implemented bounded
rationality through level-k modeling, derived from behavioral microeconomics and experiments. Thirdly, we report on some Beauty Contest experiments from the economic and neuroscience laboratory and the field with a focus on macroeconomic questions. We also include an experiment with participants of several conferences.
Cathy Zhang: “Money and Inflation in the Laboratory”We integrate theory and experiments to compare the effect of two alternative inflationary monetary policies on economic outcomes. The framework of our experiment is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We consider three treatments in this economy: a baseline policy with a fixed money supply and two inflationary monetary policies where the government fixes the growth rate of the money supply. In the first implementation (Active Government Spending), the government adjusts expenditures financed through seigniorage to achieve a target money growth rate while in the second implementation (Lump Sum Transfers), the government injects new money through lump-sum transfers to some individuals. Although the theory implies these two policies render the same stationary equilibrium where inflation is constant at the money growth rate, the experimental economies exhibit important differences in terms of the level and volatility of inflation, velocity, output and welfare.
Randall Wright: “Playing with Money”Experimental studies in monetary economics usually study infinite horizon models. Yet, laboratory sessions are conducted in finite time blocks, at the conclusion of which the sessions terminate with certainty. Finite lab sessions problematically create finite horizons which imply that monetary equilibria cannot exist, even if the actual stopping point is random. It is therefore unclear whether these experiments evaluate subjects’ use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand subgame-perfection or backward induction, or features of games that promote the use of money behaviorally, even when doing so is not an equilibrium strategy. To address this issue we present a pair of finite-horizon games where monetary exchange is an equilibrium, and report an experiment that evaluates behavior in these games in light of a finitely repeated alternative where monetary exchange is not an equilibrium.
Gabriele Camera: “Do Economic Inequalities Affect Long-Run Cooperation & Prosperity?”Issues of fairness and inequality are largely unexplored in the literature on cooperation in supergames. We provide experimental evidence that these issues affect conduct, driving subjects away from efficient play. Groups of participants faced an uncertain number of helping games each time in a random pair where a coin flip determined who could help whom. This provided exogenous variation in past opportunities, while ensuring equality of future opportunities. Full cooperation is efficient and an equilibrium. Standard theory suggests that variation in past opportunities should not affect the incentive structure, hence behavior should not respond to it. Empirically, that variation affected individual conduct and coordination on efficient play. Participants conditioned choices on own past opportunities and, with inequalities made visible, discriminated against those who were better-off.
Charles Noussair: “Contagion and return predictability in asset markets: An experimental assessment of the ‘Two trees’ model”We investigate, with a laboratory experiment, whether contagion can emerge between two risky assets despite an absence of correlation in their fundamentals. To guide our experimental design, we use the ‘Two-trees’ asset pricing model developed by Cochrane, Longstaff and Santa-Clara (2008) and evaluate some of its predictions regarding time series and cross-sectional returns in response to fundamental value shocks. We observe positive autocorrelation in the shocked asset and positive contemporaneous correlation, as the model predicts. The dividend-price ratio forecasts the returns of the risky assets both in the time series and in the cross section, as predicted by the model. However, negative cross-serial correlation is not observed and there is some unexpected momentum in the non- shocked asset.
Marco Cipriani: “Default and Endogenous Leverage in the Laboratory”We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, we do not rely on ad-hoc leverage constraints, instead, leverage endogenously arises in equilibrium. When financial assets serve as collateral, namely, assets with payoffs that do not depend on ownership (such as bonds), leverage is low and there is no default. In contrast, when non-financial assets serve as collateral, namely, assets with payoffs that depend on ownership (such as firms), leverage is higher and default occurs. In line with these theoretical predictions, leverage and default rates are higher in the treatment with non-financial assets; in contrast to the theory, however, default rates are greater than zero even when assets are financial.
Douglas Davis: “Liquidity Requirements and the Interbank Loan Market: An Experimental Investigation”We develop a stylized interbank market environment and use it to evaluate with experimental methods the effects of liquidity requirements. Baseline and liquidity-regulated regimes are analyzed in a simple shockenvironment, which features a single idiosyncratic shock, and in a compound shockenvironment, in which the idiosyncratic shock is followed by a randomly occurring second- stage shock. Interbank trading of the illiquid asset follows each shock. In the simple shock environment, we find that liquidity regulations reduce the incidence of bankruptcies, but at a large loss of investment efficiency. In the compound shock environment, liquidity regulations not only impose a loss of investment efficiency but also fail to reduce bankruptcies.
Te Bao: “The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets”Previous literature in experimental finance finds little support for the effectiveness of interest rate policy in stabilizing asset price bubbles. We run a learning to forecast experiment with an interest rate policy that is strongly responsive to deviation of asset prices from the fundamental. Our result shows that the average price deviation is significantly lower in the treatments with the interest rate policy than in the baseline treatment without the policy. Our result also suggests that the policy is effective irrespective of whether or not the purpose of it is announced/explained to the participants.