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Working Paper
Pricing decisions in an experimental dynamic stochastic general equilibrium economy
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 ...
Working Paper
Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination
An unresolved issue regarding the implementation of 'contingent capital' bonds regards identifying the best mechanism for triggering the conversion of debt into equity. This paper reports a laboratory experiment that builds on previous work to evaluate the relative desirability of two leading candidate mechanisms: a price informed regulator and a mechanistic fixed-price trigger. We find that the conversion rule in effect determines the desirability of these two mechanisms. When the conversion increases incumbent equity value, a fixed trigger is preferable, but when the conversion decreases ...
Working Paper
Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory
Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation ...
Working Paper
Bargaining Under Liquidity Constraints: Nash vs. Kalai in the Laboratory
We report on an experiment in which buyers and sellers engage in semi-structured bargaining in two dimensions: how much of a good the seller will produce and how much money the buyer will offer the seller in exchange. Our aim is to evaluate the empirical relevance of two axiomatic bargaining solutions, the generalized Nash bargaining solution and Kalai's proportional bargaining solution. These bargaining solutions predict different outcomes when buyers are constrained in their money holdings. We first use the case when the buyer is not liquidity constrained to estimate the bargaining power ...
Report
Informational contagion in the laboratory
We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the ...