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Should macroeconomists consider restricted perception equilibria? Evidence from the experimental laboratory

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  • Klaus Adam

Abstract

Abstract: This paper studies a simple model of output and inflation in the experimental laboratory. While the Rational Expectations Equilibrium (REE)predicts output and inflation to be white noise processes, output and inflation in experimental sessions display stable cyclical patterns. For about 50 model periods agents' expectations, which are the sole source of these patterns, are described extremely well by a Restricted Perceptions Equilibrium (RPE). In this equilibrium agents use the univariate forecast function which generates the lowest mean squared forecast error at the 1-step forecast horizon and iterate these forecasts to derive multi-step predictions. After about 50 model periods agents seem to learn that their simple univariate forecast function is misspecified and start to employ different forecast models for different prediction horizons. The data suggests that the new models are again optimal univariate forecast functions and evidence in favor of convergence towards the REE remains weak, even after more than 100 model periods. However, for model parameterizations where an RPE does not exist, agents' expectations are captured relatively well by the REE.

Suggested Citation

  • Klaus Adam, 2004. "Should macroeconomists consider restricted perception equilibria? Evidence from the experimental laboratory," Computing in Economics and Finance 2004 338, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:338
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    File URL: http://repec.org/sce2004/up.26816.1081414183.pdf
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    References listed on IDEAS

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    1. Robert M. Anderson & Hugo Sonnenschein, 1985. "Rational Expectations Equilibrium with Econometric Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 359-369.
    2. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-1107, September.
    3. Evans, George W. & Ramey, Garey, 2006. "Adaptive expectations, underparameterization and the Lucas critique," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 249-264, March.
    4. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-224, March.
    5. Adam, K., 2000. "Adaptive Learning and the Cyclical Behavior of Output and Inflation," Economics Working Papers eco2000/25, European University Institute.
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    More about this item

    Keywords

    Experiments; Equilibrium Selection; Restricted Perceptions Equilibrium; Univariate Forecast Functions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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