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Barcelona LeeX Experimental Economics
Summer School in Macroeconomics in Universitat Pompeu Fabra.
June 15-19, 2009: Lectures
John Duffy | Frank
Heinemann | Rosemarie Nagel
- Overview of Macroeconomic Experiments
This lecture will expose participants to the breadth of macroeconomic
topics and questions that have been explored using laboratory
methods. The aim of this lecture will be to stimulate thinking
about ideas for new projects that build on what has already
been done. In addition, participants will be encouraged to
extend laboratory methods to macroeconomic models or questions
that have not been previously addressed. Methodological issues
that are particularly relevant to macroeconomic experiments,
e.g., implementation of discounting and infinite horizons,
will also be addressed.
Duffy, J. (fortcoming), "Macroeconomics:
A Survey of Laboratory Research" to appear in Handbook
of Experimental Economics, vol. 2, edited by John
Kagel and Al Roth.
Ochs, J. (1995), "Coordination Problems,"
in J. Kagel and A.E. Roth, (Eds.), The Handbook of
Experimental Economics, (Princeton: Princeton University
Ricciuti, R. (2005), "Bringing Macroeconomics
into the Lab," working paper, University of Siena.
Duffy, J. (1998), "Monetary Theory in the
Laboratory," Federal Reserve Bank of St. Louis
Review 80, 9-26.
- Asset Pricing: Bubbles, Crashes and Expectations
Currently, economies around the world are experiencing an economic downturn brought about by the collapse of housing and equity prices and the deleveraging of the financial institutions that underwrote those assets. In this lecture we examine laboratory studies addressing asset pricing and the phenomenon of asset price bubbles and crashes. An understanding of the causes of asset price bubbles and cashes is of obvious importance to both policymakers and asset market participants. While there exists experimental designs that reliably yield asset price bubbles and crashes among inexperienced subjects, there remains much more work to be done on this topic, for instance, there is a need for an experimental design in which asset price bubbles and crashes are recurrent phenomena.
Smith, Vernon, Gerry L. Suchanek and Arlington W. Williams, 1988. “Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets,” Econometrica, 56, 1119-1151.
Lei, Vivian, Charles N. Noussair and Charles R. Plott 2001. “Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality,” Econometrica, 69, 831-859.
Dufwenberg, Martin, Tobias Lindqvist and Evan Moore, 2005. “Bubbles and Experience: An Experiment,” American Economic Review, 95, 1731–1737.
Hommes, Cars.H., Joep Sonnemans, Jan Tuinstra and Henk van de Velden, 2005. “Coordination of Expectations in Asset Pricing Experiments,” Review of Financial Studies 18, 955-980.
Ernan Haruvy, Yaron Lahav and Charles N. Noussair, 2007. “Traders' Expectations in Asset Markets: Experimental Evidence,” American Economic Review 97, 1901-1920.
Crockett, Sean and John Duffy, 2009. “A General Equilibrium Approach to Asset Pricing Experiments.” working paper.
Among the central questions in monetary theory are why intrinsically
worthless fiat money serves as a store of value and why it
is used as a medium of exchange when other assets dominate
it in rate of return. Various theories have been developed
to address these fundamental questions. For instance, overlapping
generations models of money may explain why fiat money has
value, and search-theoretic approaches can rationalize why
money is used when dominated in rate of return by other competing
assets. However, the frictions in these models -overlapping
generations and search frictions- make them difficult to take
to field data. On the other hand, a number of laboratory studies
of such models have been conducted. These lectures will outline
the main findings from those studies and point out promising
|Duffy, J. (1998), "Monetary Theory in the
Laboratory," Federal Reserve Bank of St. Louis
Review 80 (September/October), 9-26.
Lucas, R.E. (1986), "Adaptive Behavior
and Economic Theory," Journal of Business
Wallace, N. (1980), "The Overlapping Generations
Model of Fiat Money," in J.H. Kareken and N. Wallace,
Eds., Models of Monetary Economies, Federal Reserve
Bank of Minneapolis
Kiyotaki, N. and R. Wright (1989), "On
Money as a Medium of Exchange," Journal of Political
Economy 97, 927-54
Bernasconi, M. and Kirchkamp, O. (2000), "Why
Do Monetary Policies Matter? An Experimental Study of
Saving and Inflation in an Overlapping Generations Model,"
Journal of Monetary Economics 46, 315-43.
Brown, P. (1996), "Experimental Evidence
on Money as a Medium of Exchange," Journal of
Economic Dynamics and Control 20, 583-600.
Camera, G., Noussair, C., and Tucker, S. (2003),
"Rate-of-Return Dominance and Efficiency in an
Experimental Economy," Economic Theory 22,
Duffy, J. and J. Ochs (2002), "Intrinsically
Worthless Objects as Media of Exchange: Experimental
Evidence," International Economic Review
Duffy, J. and J. Ochs (1999), "Emergence
of Money as a Medium of Exchange: An Experimental Study,"
American Economic Review 89, 847-77.
Lim, S. Prescott, E.C. and Sunder, S. (1994),
"Stationary Solution to the Overlapping Generations
Model of Fiat Money: Experimental Evidence," Empirical
Economics 19, 255-77.
Marimon, R. and Sunder, S. (1994), "Expectations
and Learning under Alternative Monetary Regimes: An
Experimental Approach," Economic Theory
Marimon, R. and Sunder, S. (1993) "Indeterminacy
of Equilibria in a Hyperinflationary World: Experimental
Evidence," Econometrica 61, 1073-107.
William Stanley Jevons, the Victorian era economist/polymath
who helped launch the marginalist revolution, believed that
the solar cycle drove the business cycle and he collected
much data in support of this theory. As it turns out, business
cycles are a lot more irregular than the 11-year sunspot cycle
and there is considerable variation in the timing and duration
of business cycles across countries. So today, we honor Jevon's
folly by referring to nonfundamental or extraneous factors
that may affect economic activity as "sunspots"
(also "animal spirits, "self-fulfilling prophecies")
Examples include changes in the length of women's hemlines,
or, in the U.S., whether a team from the National Football
Conference wins the Super Bowl or the economic predictions
of the Wall Street Journal.
Formal, elegant models in which sunspot variables matter
in a rational expectations equilibrium are found in the seminal
work of Cass and Shell (1983) and Azariadis (1981). A difficulty
with testing sunspot theories concerns identification of the
non-fundamental variable agents may be coordinating and conditioning
upon. Laboratory methods can be helpful in this regard, and
in this lecture we review a couple of experimental studies
that have sought to demonstrate the existence of an equilibrium
in which sunspots matter.
Cass, D. and Shell, K. (1983), ""Do
Sunspots Matter?" Journal of Political Economy,
Azariadis, C. (1981), "Self-Fulfilling
Prophecies," Journal of Economic Theory
Duffy, J. and Fisher, E. (2005), "Sunspots
in the Laboratory," American Economic Review,
Marimon, R., Spear, S.E. and Sunder, S. (1993),
Expectationally Driven Market Volatility: An Experimental
Study," Journal of Economic Theory, 61,
- Speculative Attacks and the Theory
of Global Games - Experimental
Tests of Global Game Predictions
Speculative attacks can be viewed upon as coordination games:
if a sufficient number of traders (and a sufficient amount
of capital) is involved in an attack, the pressure on foreign
exchange markets forces the central bank to devaluate its
currency. Then, all attacking traders gain from the devaluation.
But, if the number of attackers is too small, the central
bank can defend the peg, and attacking traders lose on transaction
costs. Speculative-attack games have multiple equilibria if
payoff functions are common knowledge. The theory of global
embeds a coordination game in an environment with private
information about parameters of the payoff function. If private
information is sufficiently precise, the global game has a
unique equilibrium. Hence, the theory of global games can
be used for a unique prediction of the outcome of a speculative-attack
game. This theory provides a number of hypotheses that can
be tested in laboratory experiments. The lecture on Speculative
Attacks and the Theory of Global Games presents some of
the theoretical background and derives testable hypotheses.
The lecture on Experimental Tests of Global Game Predictions
explains experiments that have been used for these tests and
shows how they have been analyzed.
|Heinemann, Frank (2002), "Exchange-Rate
Attack as a Coordination Game: Theory and Experimental
Evidence," Oxford Review of Economic Policy
Obstfeld, Maurice (1997), "Destabilizing
Effects of Exchange-Rate Escape Clauses," Journal
of International Economics, 61-77.
Carlsson, Hans and Eric van Damme (1993), "Global
Games and Equilibrium Selection," Econometrica
Morris, S., and H.S. Shin (1998), "Unique
Equilibrium in a Model of Self-Fulfilling Currency Attacks,"
American Economic Review, 88, 587-597.
Heinemann, Frank (2000), "Unique Equilibrium
in a Model of Self-Fulfilling Currency Attacks: Comment,"
American Economic Review 90, 316-318.
Heinemann, Frank, and Gerhard Illing (2002),
"Speculative Attacks: Unique Equilibrium and Transparency,"
Journal of International Economics 58, pp. 429-450.
Heinemann, F., R. Nagel, and P. Ockenfels (2004),
"The Theory of Global Games on Test: Experimental
Analysis of Coordination Games with Public and Private
Information," Econometrica 72 (5), 2004,
Heinemann, F., R. Nagel, and P. Ockenfels (2006),
"Measuring Strategic Uncertainty in Coordination
Games," working paper.
Cornand C. (2006), "Speculative Attacks
and Informational Structure: An Experimental Study,"
Review of International Economics 14, 797-817.
- Monetary Policy and Expectations
In the 1960s and early 1970s, policymakers thought that they
could systematically raise employment by inflationary monetary
policy. Kydland and Prescott (1977) and Barro and Gordon (1983)
have shown that an asymmetric objective function of the central
bank gives rise to an inflation bias stemming from a time
inconsistency: ex ante, the central bank would like to commit
to a low average rate of inflation. Ex post, however, after
expectations have been formed, the asymmetric objective function
provides an incentive to deviate from such a commitment and
raise inflation in order to stimulate the economy and raise
the output level.
In a rational expectations equilibrium this incentive is expected
and private agents expect a rate of inflation above the social
optimum, at which the central bank has no incentive for a
further rise of inflation. Laboratory experiments can test
the hypotheses of time inconsistent policy as well as rationality
of expectations in such an environment. The lecture on Monetary
Policy and Expectations will present the fundamental problem
of time inconsistency and an experiment designed to test this
Kydland, Finn E. and Edward C. Prescott (1977),
"Rules rather than discretion: the inconsistency
of optimal plans," Journal of Political Economy
Barro, Robert J., and D.B. Gordon (1983), "A
Positive Theory of Monetary Policy in a Natural Rate
Model" Journal of Political Economy 12,
|Arifovic, Jasmina, and Thomas J. Sargent (2003),
"Laboratory Experiments with an Expectational Phillips
Curve," in: Altig, D., and B. Smith (eds.), The
Origins and Evolution of Central Banking, Cambridge
University Press, S. 23-56.
- Stabilizing Inflation and Employment
Dynamic stochastic general equilibrium (DSGE) models are
the new paradigm of macroeconomics. Within these models, monetary
policy is reduced to a dynamic control problem. Under some
restrictions, the optimal solution to such a control problem
can be described by a simple linear function with which the
instrument (interest rate) responds to current (and lagged)
inflation and output. One of the major problems of modern
central banks is model uncertainty. There is uncertainty about
the true model and its parameters. With model uncertainty,
the instrument should gradually respond to observed deviations
of inflation and output from their target values. In reality,
monetary policy is conducted by committees instead of single
agents. This raises the questions whether and why groups are
better in dealing with dynamic control problems than individuals
and how they come to an agreement in cases of diverging opinions.
Some recent experiments put subjects in the role of central
bankers and let them solve dynamic control problems of an
economic model whose parameters are not known to subjects.
Subjects have to solve these problems either individually
or ion small groups. It turns out that most subjects are able
to control inflation and their strategies can be described
by Taylor-type rules. Groups do significantly better than
individuals. The modes by which groups are organized (size,
voting rules, leadership) have no significant effect.
Clarida, R., J. Gali, and M. Gertler (1999), "Thge
Science of Monetary Policy: A New Keynesian Perspective,"
Journal of Economic Literature 37, 1661-1707.
Taylor, J. (1993), "Discretion vs. Policy Rules in
Practise", Carnegie-Rochester Conference Series on Public
Policy 39, 195-214.
Blinder, Alan, and John Morgan (2005), "Are Two Heads
Better than One? Monetary Policy by Committee," Journal
of Money, Credit, and Banking 37, 789-811.
Blinder, Alan, and John Morgan (2007), "Leadership
in Groups: A Monetary Policy Experiment," working paper.
Engle-Warnick, Jim, and Nurlan Turdaljev (2007), "An
Experimental Test of Taylor-Type Rules with Inexperienced
Central Bankers," working paper.
This lecture introduces the methods of experimental economics.
We will discuss what is an economics experiment, why we do
experiments, the different areas in experimental economics
and behavioral economics, the link between experimental economics,
theory and empirical work and important design issues.
Akerlof, G.A. (2002), "Behavioral Macroeconomics
and Macroeconomic Behavior, "American Economic
Review," 92. 411-433.
Camerer, C. (2003), "Behavioral Game Theory,"
Princeton University Press
Friedman, D. and Sunder, S. (1994), Experimental
Methods. Cambridge Univ. Press: Chapters 1-2: 1-20.
Roth, A.E. (1995), Introduction to Experimental
Economics. In: Kagel, J.H. and Roth, A.E. (eds.): Handbook
of Experimental Economics. Princeton Univ. Press: Princeton,
N.J., Chapter 1: 3-109.
Plott, C. and Smith, V. (2003), Handbook of
Experimental Economics Results, North-Holland, Amsterdam.
Porter, D. and Smith, V. L.Samuelson, L. (2005),
"Economic Theory and Experimental Economics,"
Journal of Economic Literature 43(1): 65-107.
Smith, V.L. (2002), "Method in Experiment:
Rhetoric and Reality." Experimental Economics 5(2):
Special issue (2005), Experiment, Theory, World:
A Symposium on the Role of Experiments in Economics.
Journal of Economic Methodology 12(2)
- Rational and boundedly rational
expectation: a micro and macro view
In this lecture we will discuss how micro and macro economics
incooporate bounded rational expectations in their models.
Most macroeconomic models presume that agents (usually a representative
agent) posses rational expectations, that is, expectations
consistent with knowledge of the model. Laboratory tests of
the rational expectations hypothesis suggest that subjects
do not initially form expectations consistent with the rational
expectations hypothesis; in many cases, expectations are more
consistent with an adaptive learning process. However, there
is some evidence that individuals can learn to form rational
expectations with sufficient experience.
Most micro economic models assume that people make acurate
predictions about others behavior. Typically one assumes common
knowlege of rationality among the agents which means that
everybody is rational and thinks that all are rational etc.
Based on this assumption equilibria are calculated. There
are at least two streams to explain deviations from equilibrium.
One part is to develop learning models which deviate in different
degrees from rationality. The second stream is to assume that
an agent might think that he is rational but does not think
that others are rational but instead models them as random
players. Or he might think that others are rational but these
others do not believe that their coplayers are rational. etc.
This way one can formulate different degrees of levels of
reasoning about the rationality of others. We will discuss
this second stream of literature.
Williams, A.W. (1987), "The Formation of Price
Forecasts in Experimental Markets," Journal of Money,
Credit and Banking 19, 1-18.
Dwyer, Jr., G.P., A.W. Williams, R.C. Battalio and
T.I. Mason (1993), "Tests of Rational Expectations
in a Stark Setting," Economic Journal 103, 586-601.
Marimon, R. and S. Sunder (1993) "Indeterminacy
of Equilibria in a Hyperinflationary World: Experimental
Evidence," Econometrica 61, 1073-1107.
Hommes, C.H., J. Sonnemans, J. Tuinstra and H. van
de Velden (2007), "Learning in Cobweb Experiments,"
Macroeconomic Dynamics 11 (Supplement 1), 8-33.
Camerer, C. F. (2003). Chapter 5, Dominance
Solvable Games. Behavioral game theory: Experiments
on strategic interaction. Princeton, Princeton University
Nagel Rosemarie (1995), "Unraveling in
Guessing Games: An Experimental Study." American
Economic Review 85,5, 1313-1326.