Article

Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment

Tiziana Assenza, P. Heemeijer, C.H. Hommes, and D. Massaro

Abstract

The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank’s ability to control inflation to the impact that monetary policy has on the type of feedback –positive or negative– between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.

Keywords

Laboratory experiments; Monetary policy; Expectations; Taylor principle;

JEL codes

  • C91: Laboratory, Individual Behavior
  • C92: Laboratory, Group Behavior
  • D84: Expectations • Speculations
  • E52: Monetary Policy

Reference

Tiziana Assenza, P. Heemeijer, C.H. Hommes, and D. Massaro, Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment, Journal of Monetary Economics, vol. 17, January 2021, pp. 170–186.

Published in

Journal of Monetary Economics, vol. 17, January 2021, pp. 170–186