Luba Petersen

Do expectations and decisions respond to monetary policy

Purpose - – The purpose of this paper is to explore the ability of monetary policy to generate real effects in laboratory general equilibrium production economies. Design/methodology/approach - – To understand why monetary policy is not consistently effective at stabilizing economic activity, the author vary the types of agents interacting in the economy and consider treatments where subjects are playing the role of households (firms) in an economy where automated firms (households) are programmed to behave rationally. Findings - – While the majority of participants’ expectations respond to monetary policy in the direction intended, subjects do form expectations adaptively, relying heavily on past variables and forecasts in forming two-steps-ahead forecasts. Moreover, in the presence of counterparts that are boundedly rational, forecast accuracy worsens significantly. When interacting with automated households, updating firms’ prices respond modestly to monetary policy and significantly to anticipated marginal costs and future prices. The greatest deviations in behavior from theoretical predictions arise from human households (HH). Households persistent oversupply of labor and under-consumption is attributed to precautionary saving and debt aversion. The results provide evidence that the effects of monetary policy on decision making hinge on the distribution of indebtedness of households. Originality/value - – The author present causal evidence of the effects of potential bounded rationality on agents’ consumption and labor decisions.

Stabilizing Expectations at the Zero Lower Bound: Experimental Evidence

Our study demonstrates how agents’ expectations can interact dynamically with monetary and fiscal policy at the zero lower bound. We study expectation formation near the zero lower bound using a learning-to-forecast laboratory experiment under alternative policy regimes. In our experimental economy, monetary policy targets inflation around a constant or state-dependent target. We find that subjects’ expectations significantly over-react to stochastic aggregate demand shocks and historical information, leading many economies to experience severe deflationary traps. Neither quantitatively nor qualitatively communicating the state-dependent inflation targets reduce the duration or severity of economic crises. Introducing anticipated and persistent fiscal stimulus at the zero lower bound reduces the severity of the recessions. When the recovery of fundamentals is sufficiently slow, participants’ expectations become highly pessimistic and neither monetary nor fiscal policy are effective at stabilizing the economy.

Deflating Asset Price Bubbles with Leverage Constraints and Monetary Policy

We develop an experimental production economy to study the general equilibrium and welfare effects of speculation and stabilization policies. Participants playing the role of household-investors interact in labor, output, and, in some treatments, asset markets. Without the ability to trade assets, participants over-supply costly labor to acquire saving. The presence of asset markets improves welfare by allowing investors to substitute labor income for speculative gains. Asset prices deviate substantially from fundamental value. Leverage constraints that prevent investors from borrowing for speculation are ineffective at stabilizing asset prices. Households often circumvent the constraints by excessively supplying labor and generating increased wealth which can be used for speculation. Wealth inequality is worsened due to endogenously higher interest accumulated by borrowers and savers. An asset inflation targeting policy fuels initial asset price growth but, as interest rates rise rapidly, effectively deflates asset price deviations. With learning, the policy stabilizes asset prices and consequently interest rates, which enhances welfare and reduces inequality. We develop a model of heterogeneous expectations to rationalize our experimental findings.ur experimental findings.