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Frictions in an Experimental Dynamic Stochastic General Equilibrium Economy
Author(s) -
Noussair Charles N.,
Pfajfar Damjan,
Zsiros Janos
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12791
Subject(s) - monopolistic competition , economics , welfare , general equilibrium theory , incentive , volatility (finance) , microeconomics , inflation (cosmology) , competition (biology) , economy , monetary economics , econometrics , market economy , monopoly , ecology , physics , theoretical physics , biology
We construct experimental economies, populated with human subjects, with different institutional features that have a structure and incentives similar to a dynamic stochastic general equilibrium model. An experimental economy with monopolistic competition and no menu costs generates empirical patterns that are closer to the U.S. economy than simulations or the other experimental environments. We observe greater welfare and output in a setting where goods are perfect substitutes compared to treatments with monopolistic competition. Discretionary human central bankers produce lower output and welfare compared to an automated instrumental rule. Menu costs reduce inflation volatility.