Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)

D. Pfajfar, B. Zakelj

Research output: Working paperDiscussion paperOther research output

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Abstract

Using laboratory experiments within a New Keynesian macro framework, we explore the formation of inflation expectations and its interaction with monetary policy design. The central question in this paper is how to design monetary policy in the environment characterized by heterogeneous expectations. Rules that use actual rather than forecasted inflation produce lower inflation variability and alleviate expectational cycles. Degree of responsiveness to deviations of inflation from its target in the Taylor rule produces nonlinear effects on inflation variability. We also provide considerable support for the existence of heterogeneity of inflation expectations and show that a significant proportion of subjects are rational in our experiment. However, most subjects rather than using a single model they tend to switch between alternative models.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Volume2011-091
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-091

Fingerprint

Inflation expectations
Inflation variability
Inflation
Monetary policy
Policy design
Alternative models
Deviation
Responsiveness
Nonlinear effects
Experiment
New Keynesian
Heterogeneous expectations
Proportion
Laboratory experiments
Interaction
Taylor rule

Keywords

  • Laboratory Experiments
  • Inflation Expectations
  • New Keynesian Model
  • Monetary Policy Design

Cite this

Pfajfar, D., & Zakelj, B. (2011). Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007). (CentER Discussion Paper; Vol. 2011-091). Tilburg: Economics.
Pfajfar, D. ; Zakelj, B. / Inflation Expectations and Monetary Policy Design : Evidence from the Laboratory (Replaces CentER DP 2009-007). Tilburg : Economics, 2011. (CentER Discussion Paper).
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Pfajfar, D & Zakelj, B 2011 'Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)' CentER Discussion Paper, vol. 2011-091, Economics, Tilburg.

Inflation Expectations and Monetary Policy Design : Evidence from the Laboratory (Replaces CentER DP 2009-007). / Pfajfar, D.; Zakelj, B.

Tilburg : Economics, 2011. (CentER Discussion Paper; Vol. 2011-091).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

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KW - Inflation Expectations

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KW - Monetary Policy Design

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PB - Economics

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Pfajfar D, Zakelj B. Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007). Tilburg: Economics. 2011. (CentER Discussion Paper).