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An Experimental Test of Taylor-Type Rules with Inexperienced Central Bankers

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Author Info
Jim Engle-Warnick ()
Nurlan Turdaliev

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Abstract

We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics.

Nous avons mené une étude expérimentale dans le but de savoir si les règles de décision en matière de politique monétaire sont utilisées par les banquiers inexpérimentés au sein des banques centrales. Au cours de nos expériences, des sujets établissaient un taux d’intérêt à court terme dans un contexte d’économie informatisée dans le but de maîtriser l’inflation. Une grande majorité des sujets ont appris à maîtriser efficacement l’inflation. Nous sommes d’avis que les règles du type Taylor correspondent bien aux données liées aux choix et contribuent grandement à établir l’hétérogénéité du processus de décision. Notre étude est la première à recourir à l’organisation expérimentale des données sans, pour autant, perdre de vue les règles liées à la politique monétaire qui fait le plus l’objet de surveillance et d’analyse dans le domaine de l’économie.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2006s-05.

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Date of creation: 01 May 2006
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Handle: RePEc:cir:cirwor:2006s-05

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Related research
Keywords: experimental economics; monetary policy; repeated games; Taylor rule; économie expérimentale; jeux répétés; politique monétaire; règle Taylor;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  4. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  5. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July. [Downloadable!] (restricted)
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  6. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 597-612. [Downloadable!]
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  7. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Alan S. Blinder & John Morgan, 2000. "Are Two Heads Better Than One?: An Experimental Analysis of Group vs. Individual Decisionmaking," NBER Working Papers 7909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc. [Downloadable!]
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  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  13. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  14. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  15. Weymark, Diana N., 2004. "Economic structure, policy objectives, and optimal interest rate policy at low inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 25-51, March. [Downloadable!] (restricted)
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  16. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February. [Downloadable!] (restricted)
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  17. Daniel Houser & Michael Keane & Kevin McCabe, 2002. "Behavior in a dynamic decision problem: An analysis of experimental evidence using a bayesian type classification algorithm," Experimental 0211001, EconWPA. [Downloadable!]
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  18. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
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  19. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  21. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jim Engle-Warnick & Sonia Laszlo, 2006. "Learning-by-Doing in an Ambiguous Environment," CIRANO Working Papers 2006s-29, CIRANO. [Downloadable!]
    Other versions:
  2. Pfajfar, D. & Zakelj, B., 2009. "Experimental Evidence on Inflation Expectation Formation," Discussion Paper 2009-07, Tilburg University, Center for Economic Research. [Downloadable!]
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