Nonneutrality of Money, Preferences and Expectations in Laboratory New Keynesian Economies

Abstract

This paper explores the effects of expansionary monetary policy in a laboratory New Keynesian dynamic stochastic general equilibrium environ­ment. Individual subject and market behavior are studied under semi-automated and entirely subject-driven economies. Policy occurs through a decrease in the nominal interest rate on borrowing and saving. Stationary repetition is introduced to facilitate learning. While experi­mental findings for the median session coincide with theoretical predictions, significant hetero­geneity in behavior leads to a dispersion of outcomes. Output responses most consistently match theoretical predictions in the human firm (automated household) treatment. Individual household behavior significantly differs from predicted values. Households’ persistent over­supply of labor and under-consumption is attri­buted to debt aversion. Nearly half of households respond to decreases in the real interest rate and increases in the real wage by contracting their demand and labor supply. Subjects form expec­tations adaptively, relying heavily on past varia­bles and forecasts in forming twosteps-ahead forecasts, but despite numerous repetitions, exhibit significant difficulty forming expectations on impact of the shock.

Keywords: New Keynesian, dynamic stochastic general equilibrium, laboratory experiment, Expe­rimental macroeconomics, monetary policy, preferences
JEL codes: C92, D02, D03, D21, D40, D51, D84, D90, E10, E52