An experimental test of Taylor-type rules with inexperienced central bankers

Jim Engle‐Warnick · Nurlan Turdaliev

29 citations0/0 files storedExperimental Economics

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Monetary Policy and Economic Impact Experimental Behavioral Economics Studies Economic theories and models

Abstract

Abstract We experimentally test monetary policy 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 by correctly putting higher weight on inflation than on the output gap. In fact, the behavior of these subjects meets a stability criterion. The subjects smooth the interest rate as the theoretical literature suggests they should in order to enhance stability of the uncertain system they face. Our study is the first to use Taylor-type rules as a framework to identify inflation weighting, stability, and interest-rate smoothing as behavioral outcomes when subjects try to achieve an inflation target.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 2007z-Tree: Zurich toolbox for ready-made economic experiments 1993Discretion versus policy rules in practice 1995Estimating long-run relationships from dynamic heterogeneous panels 1999The Science of Monetary Policy: A New Keynesian Perspective 1982Formulation and estimation of dynamic models using panel data 1998Monetary policy rules in practice 1997An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy

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