Pricing decisions in an experimental dynamic stochastic general equilibrium economy

Abstract

a b s t r a c tWe construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian dynamic stochastic general equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.Published by Elsevier B.V.

1. Macroeconomics: A Survey of Laboratory Research

“…A second approach, as pursued by Noussair et al (2013Noussair et al ( , 2015 and Petersen (2015) has been to implement complete structural versions of a New Keynesian dynamic stochastic general equilibrium model in the laboratory with different subjects playing the role of households, firms, even the central bank -a setup reminiscent of Lian and Plott (1998) and Noussair et al (2007). These experimental designs are necessarily simplified approximations to the standard nonlinear model -for instance both studies have to approximate Dixit-Stiglitz preferences for the variety of goods produced by firms.…”

Inflation Expectations and Monetary Policy Design: Evidence From the Laboratory

“…There is a tradeoff between using the model from "first principles" and employing a reduced form. The former has the advantage of setting the objectives (payoff function) exactly in line with the microfoundations since subjects act as producers and consumers and interact on both the labor and final product markets [for this approach, see Noussair et al (2011Noussair et al ( , 2015]. However, forecasts are difficult to elicit in such an environment because subjects do not explicitly provide forecasts.…”

On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations

“…More generally, experimental investigations of macroeconomic phenomena have started to become important, especially in the field of monetary economics. Among the various studies using experimental methods in macroeconomics, see, e.g.,Arifovic and Sargent (2003), Engle-Warnick and Turdaliev (2010),Luhan and Scharler (2014),Lambsdorff et al (2013),Kryvtsov and Petersen (2013) andNoussair et al (2015). For a nice and rather comprehensive overview of macroexperiments, seeDuffy (2016).…”

“…Other closely related LtFEs includeAssenza et al (2013),Arifovic and Petersen (2017) andMauersberger (2018). 7 While a full model (e.g., inNoussair et al (2015)) generates payoffs in line with microfoundations and economic agents' roles in reality (in so far as subjects represent consumers and producers who directly interact on the product and labour markets), forecasts are complicated to elicit from subjects' tasks.…”