Experiments on Expectations in Macroeconomics and Finance

Assenza, Tiziana; Bao, Te; Hommes, Cars; Massaro, Domenico

doi:10.1108/s0193-230620140000017002

Cited by 100 publications

(63 citation statements)

References 95 publications

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“…Agents make their everyday choices based on their expectations. As suggested in Assenza et al (2014), we should think of an economy as an expectation feedback mechanism in which expectations influence individual decisions and these choices define the realisation of the main macro or financial variables.…”

Section: Introductionmentioning

confidence: 99%

Adaptive expectations versus rational expectations: Evidence from the lab

Colasante

Palestrini

Russo

et al. 2017

International Journal of Forecasting

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The aim of the present work is to shed light on the extensive debate about expectations in financial market. We analyze the behavior of subjects in an experimental environment in which it is possible to directly observe expectations since the sole task of each player is to predict the future price of an asset. We investigate the mechanism of expectation formation in two different contexts: in the first, the fundamental value is constant; in the second, the fundamental price increases over repetitions. First of all we observe if, according to the main results shown in Palestrini and Gallegati (2015), there is a convergence to the rational equilibrium even if agents have adaptive expectations. Moreover, we concentrate on the accuracy of aggregate forecasts compared with the individual forecasts. We find that there is collective rationality instead of individual rationality. In the context of increasing fundamental value, contrary to the theoretical predictions, players are able to capture the trend but they underestimate that value. This implies that if all agents make their forecasts according to an adaptive scheme, there is no full convergence to the rational expectations equilibrium.

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Section: Introductionmentioning

confidence: 99%

Adaptive expectations versus rational expectations: Evidence from the lab

Colasante

Palestrini

Russo

et al. 2017

International Journal of Forecasting

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show abstract

“…Besides this approach, there is a complementary 'learning to forecast' (henceforth LtF) experimental design introduced by Marimon et al (1993) (see Hommes, 2011;Assenza et al, 2014, for comprehensive surveys). Hommes et al (2005) run an experiment where subjects act as professional advisers (forecasters) for a pension fund: they submit a price forecasts, which is transformed into a quantity decision of buying/selling by a computer program based on optimization over a standard myopic mean-variance utility function.…”

mentioning

confidence: 99%

Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. (0)10 408 Abstract. This experiment compares the price dynamics and bubble formation in an asset market with a price adjustment rule in three treatments where subjects (1) submit a price forecast only, (2) choose quantity to buy/sell and (3) perform both tasks. We find deviation of the market price from the fundamental price in all treatments, but to a larger degree in treatments (2) and (3). Mispricing is therefore a robust finding in markets with positive expectation feedback. Some very large, recurring bubbles arise, where the price is 3 times larger than the fundamental value, which were not seen in former experiments. Terms of use: Documents inJEL Classification: C91, C92, D53, D83, D84

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“…Hommes (2011) and Assenza et al (2014) survey learning-to-forecast experiments. In these experiments, participating subjects forecast prices, while the realized price depends on the average forecast.…”

Section: Adjustments Towards Equilibriummentioning

confidence: 99%

“…Assenza et al (2014) and Heemeijer et al (2009)) suggests that the speed of convergence and the stability of equilibrium are negatively related to the degree of strategic complementarity. Hence, a monetary policy obeying the Taylor principle speeds up the convergence process and contributes to stability not just because it yields a unique equilibrium but also because it stabilizes the economy in case of shocks to agents' beliefs about other agents' actions.…”

Section: Introductionmentioning

confidence: 99%

Monetary Policy Obeying the Taylor Principle Turns Prices into Strategic Substitutes

Cornand

Heinemann

2018

SSRN Journal

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Abstract:Monetary policy affects the degree of strategic complementarity in firms' pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms' pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications. Keywords:monopolistic competition, monetary policy rule, pricing decisions, strategic complementarity, strategic substitutability JEL codes: Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.

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Experiments on Expectations in Macroeconomics and Finance

Cited by 100 publications

References 95 publications

Adaptive expectations versus rational expectations: Evidence from the lab

Adaptive expectations versus rational expectations: Evidence from the lab

Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments

Monetary Policy Obeying the Taylor Principle Turns Prices into Strategic Substitutes

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