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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Pricing decisions in an experimental dynamic stochastic general equilibrium economy
Charles N. Noussair
Damjan Pfajfar
Janos Zsiros
Abstract

We 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.


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Charles N. Noussair & Damjan Pfajfar & Janos Zsiros, Pricing decisions in an experimental dynamic stochastic general equilibrium economy, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2014-93, 24 Oct 2014.
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Keywords: Experimental economics; DSGE economy; pricing behavior; menu costs
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