Experiments on Macroeconomics and Learning
Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)
- Chair: Luba Petersen, Simon Fraser University
Least Squares Learning? Evidence from the Laboratory
AbstractWe report on an experiment testing the empirical relevance of least squares (LS) learning, a common way of modelling how individuals learn a rational expectations equilibrium (REE). Subjects are endowed with the correct perceived law of motion (PLM) for a price level variable they are seeking to forecast, but do not know the true parameterization of that PLM. Instead, they must choose and can adjust the parameters of this PLM over 50 periods. Consistent with the E-stability of the REE in the model studied, 93.1% of subjects achieve convergence to the REE in terms of their price level predictions. However, only 20.3% of subjects can be characterized as least squares learners via the adjustments they make to the parameterization of the PLM over time. We also find that subjects’ parameter estimates are more accurate when there is greater variance in the independent variable of the model. We consider several alternatives to least squares learning and find that a generalized adaptive learning model provides the best fit to our data.
Escaping Secular Stagnation with Unconventional Monetary Policy
AbstractWe design a new experimental framework to study policy interventions to combat secular stagnations and liquidity traps in an overlapping-generations environment where participants form expectations and make real economic decisions. We observe that participants can learn to coordinate on high inflation full-employment equilibria. Permanent deleveraging shocks induce pessimistic, backward-looking expectations and considerable consumption heterogeneity as the economies experience persistent deflation. We explore the ability of unconventional monetary policy to lead economies out of deflationary traps, and find that permanently increasing the central bank's inflation target is insufficient to generate inflationary expectations. Negative interest rates stimulate spending and generate the necessary inflation for the economies to escape the zero lower bound. Negative interest rates are more potent than raising the inflation target at shifting consumption to the present. Our findings suggest that unconventional monetary policy works more effectively through wealth effects than through the expectations channel.
What People Believe about Public Finance and What We Can(’t) Do about It: Evidence from a Large-Scale Multi-Country Survey Experiment
AbstractWe conduct a large-scale multi-country survey on households’ understanding and beliefs about public finance. We measure macroeconomic literacy and find that more knowledgeable respondents support more central bank (CB) independence and fiscal discipline, less monetary-financed proposals and expect more inflation if these proposals were to be implemented. A CB communication piece opposing monetary financed stimulus can shift respondents’ opinions in these directions no matter their level of macroeconomic literacy. However, prior beliefs matter and contradictory information may be polarizing. Information affects the respondents’ views by shifting their inflation and tax expectations associated to these policies.
- E7 - Macro-Based Behavioral Economics
- C9 - Design of Experiments