Role of monetary policy in a New Keynesian economy: a note from a laboratory experiment

Abstract

This paper discusses an experimental study on the role of monetary policy within a New Keynesian macroeconomic framework. The novelty of this article is that each subject was asked to forecast both the inflation rate and output gap at the same time one period ahead, which is an improvement over the existing literature. We find that if both the expected inflation rate and expected output gap is incorporated in the monetary policy rule then inflation can be anchored and stabilized more efficiently.

Keywords:

• Taylor rule
• New Keynesian model
• experimental economics
• inflation expectation
• output gap expectation

Acknowledgement

The authors would like to thank, an anonymous referee, Ajitava RoyChoudhury, Ambar Nath Ghosh, Damjan Pfajfar, Debasish Mondal, Sanmitra Ghosh, Siddhartha Chattopadhyay, Sugato Dasgupta for their comments and suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. There are other similar studies reported about the same time: Das (2009), Das, Ghosh, and Gupta (2012), and Kryvtsov and Petersen (2013).

2. Detailed instructions sheet is available on request from authors.

3. Data points on actual inflation rate, actual output gap and actual interest rate: 1404 each; data points on expected inflation rate and expected output gap: 11,232 each

4. The plotting of the frequency distribution of expectation of inflation rate and the expectation of output gap for each treatment shows that the distributions are not symmetric. The same story is repeated when we plot inflation rate expectation and the output gap expectation taking all the data together as represented in Figure 3. Therefore, it is not a suitable proposition for equality of the mean test of the distribution, and median test is the right choice in this case. Siegel and Castellan (1988, 124) suggested the median test when one or more observations are ‘off the scale’. Moreover, we did not consider any distribution about both the inflation expectation and the output gap expectation in our experimental data; hence, we run a nonparametric median test, i.e. Kruskal and Wallis rank test of median, which is widely used and accepted.

Additional information

Funding

Financial support from the Social Science and Cultural Resources programme, UPE II, Jadavpur University made the study possible.

Notes on contributors

Abhishek Das

Abhishek Das is a PhD scholar at Department of Economics in Jadavpur University. His areas of interest are Experimental Economics, Macro Economics, and Environmental Management.

Gautam Gupta

Dr Arpita Ghose, PhD from Indian Statistical Institute, Kolkata, is an Associate Professor in Economics, Jadavpur University. Her areas of interest are Applied Development-Economics, Econometrics and Macroeconomics.

Dr Gautam Gupta, PhD from University of Florida, USA, is a Professor in Economics, Jadavpur University. His areas of interest are Experimental Economics and Environmental Economics.