An intensive 5-day summer school devoted to instructing macroeconomists in experimental methods will be offered on the main campus of the Universitat Pompeu Fabra from June 18-22, 2007. The aim of the summer school will be both to promote experimental methods among macroeconomists and to assist with and critique participants' proposals for macroeconomic experiments.

There are many insights to be gained from controlled laboratory experimentation that cannot be obtained using standard macroeconometric approaches, i.e., econometric analyses of the macroeconomic data reported by government agencies. Often the data most relevant to testing a macroeconomic model are simply unavailable. There may 
also be identification, endogeneity and equilibrium selection issues that cannot be satisfactorily addressed using econometric methods. Indeed, Nobel Laureate Robert Lucas (1986) was among the first macroeconomist to make such observations and he invited laboratory tests of rational expectations macroeconomic models. The summer school will review the experimental literature in macroeconomics that has arisen in the 20 years since Lucas's invitation. A tentative schedule of topics to be covered is given below.

Day 1: Introduction

09:00-09:30	Welcome
09:30-11:00	Basic Experimental Methodology (Rosemarie Nagel) Key Readings: Samuelson (2005), Smith (2002)
11:30-13:00	Participation in Double Oral Auction Experiment; introduction of participants
	Lunch
14:30-16:00	Overview of Macroeconomic Experiments (John Duffy) Key Readings: Ochs (1995), Duffy (1998), Ricciuti (2005).
16:30-18:00	Participate in Asset Pricing/Bubble Experiment; Form Groups to work on Projects

 

Day 2: Partial Equilibrium and Bubbles

09:00-10:30	Partial equilibrium (Rosemarie Nagel) Key readings: Smith (1982). Sunder (1995) pp. 445-467.
11:00-13:00	Group session: work on project
	Lunch
14:30-16:00	Asset Price Bubbles (John Duffy) Key Readings: Smith, Sushanek and Williams (1998); Lei, Noussair and Plot (2001)
16:30-17:45	Participation in Money Search Experiment/Policy Experiment.

 

Day 3: Monetary Theory and Policy

09:00-10:30	Money Search Experiments (John Duffy) Key Readings: Kiyotaki and Wright (1989); Duffy and Ochs (1999, 2002)
11:00-13:00	Group Session: work on project
	Lunch
14:30-16:00	Participation in Money Search Experiment/Policy Experiment.

 

Day 4: Coordination Problems

09:00-10:30	Keynesian Coordination Failures (Rosemarie Nagel) Key Readings: Van Huyck et al. (1990); Weber (2006).
11:00-13:00	Group Session
	Lunch
14:30-16:00	Sunspots (John Duffy) Marimon, Spear and Sunder (1993); Duffy and Fisher (2005).
16:30-17:30	Participate in a Global Game Experiment

 

Day 5: Global Games and Student Presentations

09:00-10:30	Speculative Attacks and the Theory of Global Games (Frank Heinemann) Key Readings: Carlsson and van Damme (1993); Morris and Shin (1998); Heinemann (2000)
11:00-12:30	Experimental Tests of Global Game Predictions Key Readings: Nagel, Heinemann and Ockenfels (2004, 2006)
	Lunch
14:30-16:00	Student Presentations of Projects
17:00-19:00	Student Presentations of Projects

 

John Duffy

John Duffy earned his PhD from UCLA in 1992. He is Professor of Economics at the University of Pittsburgh and Director of the Pittsburgh Experimental Economics Laboratory. He was visiting Scholar in the Federal Reserve Bank of St. Louis. His research interests include macroeconomics, monetary economics, learning and experiments. He serves on the editorial boards of European Economic Review, Experimental Economics and the Journal of Economic Dynamics and Control.

Selected publications:

Duffy, J. (in press), "Experimental Macroeconomics" to appear in the New Palgrave Dictionary of Economics, 2nd Ed.

Duffy, J. and E. Fisher (2005), "Sunspots in the Laboratory", American Economic Review, 95, 510-29.

Duffy, J. and J. Ochs (2002), "Intrinsically Worthless Objects as Media of Exchange: Experimental Evidence", International Economic Review, 43, 637-73.

Duffy, J. and J. Ochs (1999), "Emergence of Money as a Medium of Exchange: An Experimental Study", American Economic Review 89, 847-77.

 

Frank Heinemann

Frank Heinemann is Professor of Macroeconomics at Technical University Berlin, Germany. He earned his PhD in Mannheim in 1996. He has taught macroeconomics and game theory at the universities of Frankfurt am Main, Munich (LMU) and Mannheim and at the German central bank (Bundesbank) before he changed to Berlin in 2006. His main areas of research are monetary macroeconomics and coordination games.

Selected publications:

"Optimal Degree of Public Information Dissemination" (with Camille Cornand), forthcoming in The Economic Journal.

"Wage Indexation and Monetary Policy", Journal of Institutional and Theoretical Economics 162 (3), 2006, pp. 486-504.

"The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information" (with Rosemarie Nagel and Peter Ockenfels), Econometrica 72 (5), 2004, pp. 1583-1599.

"Speculative Attacks: Unique Equilibrium and Transparency" (with Gerhard Illing), Journal of International Economics 58 (2), 2002, pp. 429-450.

 

Rosemarie Nagel

Rosemarie Nagel is ICREA research professor, research director of the experimental laboratory (LEEX) at the Universitat Pompeu Fabra, and member of CESifo. She earned her PhD in the European Doctoral Program at the University of Bonn (1994). She was Postdoctoral fellow at the University of Pittsburgh and visiting associate professor at CES Munich and Caltech. She taught experimental economics in undergraduate and graduate courses in the University of Pittsburgh, University of Bonn, Universitat Pompeu Fabra, and summer schools summer of University of Trento, Lyon, Pompeu Fabra, and in workshops by the Muenchner Rueck and Bayerische Hypobank. Her research interest is in experimental and behavioural economics and neuro economics.

Selected publications:

"Price Floors & Competition" (with Martin Dufwenberg, Uri Gneezy, and Jacob Goeree), forthcoming in Economic Theory

"The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information" (with Frank Heinemann, and Peter Ockenfels), Econometrica 72 (5), 2004, pp. 1583-1599.

"One, Two, (Three), Infinity…: Newspaper and Lab Beauty-Contest Experiments", (with Antoni Bosch-Domènech , Jose García-Montalvo , and Albert Satorra), American Economic ReviewDecember 2002, Vol 92 No.5, pp 1687-1701.

"The Effect of Intergroup Competition on Group Coordination: An Experimental Study" (with G. Bornstein and U. Gneezy). Games and Economic Behavior Volume 41, October 2002, pp.1-25.

John Duffy

• Overview of Macroeconomic Experiments

This lecture will expose participants to the breadth of macroeconomic topics and questions that have been explored using laboratory methods. The aim of this lecture will be to stimulate thinking about ideas for new projects that build on what has already been done. In addition, participants will be encouraged to extend laboratory methods to macroeconomic models or questions that have not been previously addressed. Methodological issues that are particularly relevant to macroeconomic experiments, e.g., implementation of discounting and infinite horizons, will also be addressed.

Readings:

Ochs, J. (1995), "Coordination Problems," in J. Kagel and A.E. Roth, (Eds.), The Handbook of Experimental Economics, (Princeton: Princeton University Press).

Ricciuti, R. (2005), "Bringing Macroeconomics into the Lab," working paper, University of Siena.

Duffy, J. (1998), "Monetary Theory in the Laboratory," Federal Reserve Bank of St. Louis Review 80, 9-26.

Duffy, J. (in press), "Experimental Macroeconomics" to appear in the New Palgrave Dictionary of Economics, 2nd Ed.

 

• Asset Price Bubbles

The idea that asset prices might depart from fundamentals for a sustained period of time has a long history with many famous examples, e.g., the Dutch tulip mania of the 17th century of the South Sea bubble of the 18th century. Surprisingly, little is known as to the causes of such "bubbles" or what steps might be taken to prevent them from occurring in the first place. Standard theory allows for "rational" explosive bubbles, but actual asset price bubbles appear to be at odds with this rational bubble prediction.

Smith, Suchanek, and Williams (Econometrica 1988) devised an experimental design that regularly gives rise to asset price bubbles and crashes. This design has spawned a literature that has sought to understand the source of these laboratory asset price bubbles and the methods by which they might be eliminated. In this lecture we review the Smith et al. design as well as the many subsequent experimental studies of asset price bubbles and crashes.

Literature:

Theory:

LeRoy, S.F. (2004), "Rational Exuberance" Journal of Economic Literature 42, 783-804.

Tirole, J. (1985), "Asset Bubbles and Overlapping Generations," Econometrica 53, 1071-1100.

Shiller, R.J. (1981), "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?" American Economic Review 71, 421-436

Experiments:

Smith, V.L., G.L Suchanek and A.W. Williams (1988), ``Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets", Econometrica 56, 1119-1151.

Smith, V.L., M. van Boening, and C.P. Wellford (2000), Dividend Timing and Behavior in Laboratory Asset Markets," Economic Theory 16, 567-83

Lei, V., C.N. Noussair and C.R. Plott (2001), "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, 69, pp. 831-59.

Noussair, C.N., S. Robin, and B. Ruffieux (2001), "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, 4, 87-105.

Dufwenberg, M., T. Lindqviist and E. Moore (2005)," Bubbles and Experience: An Experiment," American Economic Review 95, 1731-1737.

Hommes, C., J. Sonnemans, J. Tuinstra, and H. van de Velden (2005a), "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies 18, pp. 955-80.

Hommes, C., J. Sonnemans, J. Tuinstra, and H. van de Velden (2005b), "A Strategy Experiment in Dynamic Asset Pricing," Journal of Economic Dynamics and Control 29, 823-43.

Duffy, J. and M.U. Unver, (2006), "Asset Price Bubbles and Crashes with Near-Zero-Intelligence Traders," Economic Theory 27, 537-63.

 

• Monetary Theory

Among the central questions in monetary theory are why intrinsically worthless fiat money serves as a store of value and why it is used as a medium of exchange when other assets dominate it in rate of return. Various theories have been developed to address these fundamental questions. For instance, overlapping generations models of money may explain why fiat money has value, and search-theoretic approaches can rationalize why money is used when dominated in rate of return by other competing assets. However, the frictions in these models -overlapping generations and search frictions- make them difficult to take to field data. On the other hand, a number of laboratory studies of such models have been conducted. These lectures will outline the main findings from those studies and point out promising new extensions.

Literature:

Introduction:

Duffy, J. (1998), "Monetary Theory in the Laboratory," Federal Reserve Bank of St. Louis Review 80 (September/October), 9-26.

Theory:

Lucas, R.E. (1986), "Adaptive Behavior and Economic Theory," Journal of Business 59,
S401-S426.

Wallace, N. (1980), "The Overlapping Generations Model of Fiat Money," in J.H. Kareken and N. Wallace, Eds., Models of Monetary Economies, Federal Reserve Bank of Minneapolis

Kiyotaki, N. and R. Wright (1989), "On Money as a Medium of Exchange," Journal of Political Economy 97, 927-54

Experiments:

Bernasconi, M. and Kirchkamp, O. (2000), "Why Do Monetary Policies Matter? An Experimental Study of Saving and Inflation in an Overlapping Generations Model," Journal of Monetary Economics46, 315-43.

Brown, P. (1996), "Experimental Evidence on Money as a Medium of Exchange," Journal of Economic Dynamics and Control 20, 583-600.

Camera, G., Noussair, C., and Tucker, S. (2003), "Rate-of-Return Dominance and Efficiency in an Experimental Economy," Economic Theory 22, 629-60.

Duffy, J. and J. Ochs (2002), "Intrinsically Worthless Objects as Media of Exchange: Experimental Evidence," International Economic Review 43, 637-73.

Duffy, J. and J. Ochs (1999), "Emergence of Money as a Medium of Exchange: An Experimental Study," American Economic Review 89, 847-77.

Lim, S. Prescott, E.C. and Sunder, S. (1994), "Stationary Solution to the Overlapping Generations Model of Fiat Money: Experimental Evidence," Empirical Economics 19, 255-77.

Marimon, R. and Sunder, S. (1994), "Expectations and Learning under Alternative Monetary Regimes: An Experimental Approach," Economic Theory 4, 131-62.

Marimon, R. and Sunder, S. (1993) "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica 61, 1073-107.

 

• Sunspots

William Stanley Jevons, the Victorian era economist/polymath who helped launch the marginalist revolution, believed that the solar cycle drove the business cycle and he collected much data in support of this theory. As it turns out, business cycles are a lot more irregular than the 11-year sunspot cycle and there is considerable variation in the timing and duration of business cycles across countries. So today, we honor Jevon's folly by referring to nonfundamental or extraneous factors that may affect economic activity as "sunspots" (also "animal spirits, "self-fulfilling prophecies") Examples include changes in the length of women's hemlines, or, in the U.S., whether a team from the National Football Conference wins the Super Bowl or the economic predictions of the Wall Street Journal.

Formal, elegant models in which sunspot variables matter in a rational expectations equilibrium are found in the seminal work of Cass and Shell (1983) and Azariadis (1981). A difficulty with testing sunspot theories concerns identification of the non-fundamental variable agents may be coordinating and conditioning upon. Laboratory methods can be helpful in this regard, and in this lecture we review a couple of experimental studies that have sought to demonstrate the existence of an equilibrium in which sunspots matter.

Theory:

Cass, D. and Shell, K. (1983), ""Do Sunspots Matter?" Journal of Political Economy, 91, 193-227.

Azariadis, C. (1981), "Self-Fulfilling Prophecies," Journal of Economic Theory 25, 380-96.

Experiments:

Duffy, J. and Fisher, E. (2005), "Sunspots in the Laboratory," American Economic Review, 95, 510-29.

Marimon, R., Spear, S.E. and Sunder, S. (1993), Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, 61, 74-103.

 

Frank Heinemann

• Speculative Attacks and the Theory of Global Games - Experimental Tests of Global Game Predictions

Speculative attacks can be viewed upon as coordination games: if a sufficient number of traders (and a sufficient amount of capital) is involved in an attack, the pressure on foreign exchange markets forces the central bank to devaluate its currency. Then, all attacking traders gain from the devaluation. But, if the number of attackers is too small, the central bank can defend the peg, and attacking traders lose on transaction costs. Speculative-attack games have multiple equilibria if payoff functions are common knowledge. The theory of global embeds a coordination game in an environment with private information about parameters of the payoff function. If private information is sufficiently precise, the global game has a unique equilibrium. Hence, the theory of global games can be used for a unique prediction of the outcome of a speculative-attack game. This theory provides a number of hypotheses that can be tested in laboratory experiments. The lecture on Speculative Attacks and the Theory of Global Games presents some of the theoretical background and derives testable hypotheses. The lecture on Experimental Tests of Global Game Predictions explains experiments that have been used for these tests and shows how they have been analyzed.

Literature:

Introduction:

Heinemann, Frank (2002), "Exchange-Rate Attack as a Coordination Game: Theory and Experimental Evidence," Oxford Review of Economic Policy 18, 462-478.

Theory:

Obstfeld, Maurice (1997), "Destabilizing Effects of Exchange-Rate Escape Clauses," Journal of International Economics, 61-77.

Carlsson, Hans and Eric van Damme (1993), "Global Games and Equilibrium Selection," Econometrica 61, 989-1018.

Morris, S., and H.S. Shin (1998), "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, 88, 587-597.

Heinemann, Frank (2000), "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment," American Economic Review 90, 316-318.

Heinemann, Frank, and Gerhard Illing (2002), "Speculative Attacks: Unique Equilibrium and Transparency," Journal of International Economics 58, pp. 429-450.

Hellwig, Christian (2002), "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory 107, 191-222.

Corsetti, G., A. Dasgupta, S. Morris, and H.S. Shin (2004), "Does One Soros Make Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, 71, 87-114. 

Experiments:

Heinemann, F., R. Nagel, and P. Ockenfels (2004), "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica 72 (5), 2004, pp. 1583-1599.

Heinemann, F., R. Nagel, and P. Ockenfels (2006), "Measuring Strategic Uncertainty in Coordination Games," working paper.

Cornand C. (2006), "Speculative Attacks and Informational Structure: An Experimental Study,"Review of International Economics 14, 797-817.

Arikawa, Y., K. Suzuki-Löffelholz, and K. Taketa (2006), "Experimental Analysis on the Role of a large Speculator in Currency Crises," working paper.

Cheung, Y-W., and D. Friedman (2006), "Speculative Attacks: A Laboratory Study in Continuous Time," working paper, Dept. of Economics, University of California, Santa Cruz. 

 

• Monetary Policy and Expectations

In the 1960s and early 1970s, policymakers thought that they could systematically raise employment by inflationary monetary policy. Kydland and Prescott (1977) and Barro and Gordon (1983) have shown that an asymmetric objective function of the central bank gives rise to an inflation bias stemming from a time inconsistency: ex ante, the central bank would like to commit to a low average rate of inflation. Ex post, however, after expectations have been formed, the asymmetric objective function provides an incentive to deviate from such a commitment and raise inflation in order to stimulate the economy and raise the output level.
In a rational expectations equilibrium this incentive is expected and private agents expect a rate of inflation above the social optimum, at which the central bank has no incentive for a further rise of inflation. Laboratory experiments can test the hypotheses of time inconsistent policy as well as rationality of expectations in such an environment. The lecture on Monetary Policy and Expectations will present the fundamental problem of time inconsistency and an experiment designed to test this theory.

Literature:

Theory:

Kydland, Finn E. and Edward C. Prescott (1977), "Rules rather than discretion: the inconsistency of optimal plans," Journal of Political Economy 85, 473-491.

Barro, Robert J., and D.B. Gordon (1983), "A Positive Theory of Monetary Policy in a Natural Rate Model" Journal of Political Economy 12, 101-121.

Experiment:

Arifovic, Jasmina, and Thomas J. Sargent (2003), "Laboratory Experiments with an Expectational Phillips Curve," in: Altig, D., and B. Smith (eds.), The Origins and Evolution of Central Banking, Cambridge University Press, S. 23-56.

 

Rosemarie Nagel

• Methodology

This lecture introduces the methods of experimental economics. We will discuss what is an economics experiment, why we do experiments, the different areas in experimental economics, the link between experimental economics, theory and empirical work and important design issues.

Literature:

Akerlof, G.A. (2002), "Behavioral Macroeconomics and Macroeconomic Behavior, "American Economic Review," 92. 411-433.

Camerer, C. (2003), "Behavioral Game Theory," Princeton University Press

Friedman, D. and Sunder, S. (1994), Experimental Methods. Cambridge Univ. Press: Chapters 1-2: 1-20.

Roth, A.E. (1995), Introduction to Experimental Economics. In: Kagel, J.H. and Roth, A.E. (eds.): Handbook of Experimental Economics. Princeton Univ. Press: Princeton, N.J., Chapter 1: 3-109.

Plott, C. and Smith, V. (2003), Handbook of Experimental Economics Results, North-Holland, Amsterdam.

Porter, D. and Smith, V. L.Samuelson, L. (2005), "Economic Theory and Experimental Economics," Journal of Economic Literature 43(1): 65-107.

Smith, V.L. (2002), "Method in Experiment: Rhetoric and Reality." Experimental Economics 5(2): 91-110.

Special issue (2005), Experiment, Theory, World: A Symposium on the Role of Experiments in Economics. Journal of Economic Methodology 12(2)

 

• Coordination

Coordination games are games with multiple equilibria. In these cases theory might either be mute about which equilibrium should be reached or specifies criteria as choosing the less "risky" or more efficient equilibrium. Experiments can help to select the equilibrium which is behaviorally more relevant. This lecture introduces the basic issues of coordination through simple experiments and teaches how communication, long time horizon, competition, outside option, sunk costs, etc. can lead to or away from Keyes-type coordination failures -ie. Pareto inferior equilibria. The coordination chapters by Jack Ochs (1995) and Colin Camerer (2003) provide excellent overviews of the experimental literature of the topic.

Literature:

Ochs, J. (1995), "Coordination", in Handbook of Experimental Economics, J. Kagel and A. Roth (editors), Princeton University Press.

Camerer, C. (2003), "Coordination" (pp. 336-407) in Behavioral Game Theory, Princeton University Press.

COOPER, Russell W. (1999), Coordination Games: Complementarities and Macroeconomics, Cambridge University Press, Cambridge, UK.

Bornstein, G., U. Gneezy, and R. Nagel (2002), "The Effect of Intergroup Competition on Group Coordination: An Experimental Study," Games and Economic Behavior Volume 41, October, Pp.1-25.

Fehr, E. and Tyran, J.-R. (2001), "Does Money Illusion Matter?" American Economic Review 91(5): 1239-62.

Weber, R. (2006), "Unraveling in Guessing Games: An Experimental Study." American Economic Review 85,5, 1313-1326.

Van Huyck, J. B., R. C. Battalio, and R. O. Beil (1990), "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review 80, 234-248.

Van Huyck, J. B., R. C. Battalio, And R. O. Beil (1991), "Strategic Uncertainty, Equilibrium Selection, and Coordination Failure In Average Opinion Games," Quarterly Journal Of Economics106, 885-910.

Weber, R. (2006), "Managing Growth to Achieve Efficient Coordination in Large Groups," American Economic Review 96(1): 114-26.

 

• Partial Equilibrium

Double oral auctions are great examples of how markets can work in the lab, when theory is at its "best", although none of the participants can behave optimally given their limited information of the market. In this lecture we will discuss how mechanisms as availability of information, futures markets, etc and market structure drive behaviour towards or away from competitive equilibrium. The three first references below provide excellent overviews of this stream of literature. Chamberlain's class room experiments inspired Vernon Smith to construct the "double oral auction" mechanism.

Literature:

Davis, Douglas D. and Charles A. Holt (1993), Experimental Economics. Princeton: University Press.

Holt, Charles A. (1995), Industrial Organization: A Survey of Laboratory Research. in J.H. Kagel, and A. E. Roth, The Handbook of Experimental Economics, Princeton, p. 349-435.

Sunder (1995), "Experimental Asset Markets: A Survey" in J.H. Kagel and A.E. Roth, eds., The Handbook of Experimental Economics, Princeton, 445-500.

Chamberlain, Edward H.(1948), "An Experimental Imperfect Market," Journal of Political Economy. Vol. 56, 1948, pp. 95-108.

Gode, D. and S. Sunder (1993), "Allocative Efficiency of Markets with ZI Traders," Journal of Political Economy, 119-37.

Holt, Charles A., L. Langan y Anne P. Villamil (1986), "Market Power in Oral Double Auctions,"Economic Enquiry, January 1986, p. 107-123.

Smith, V. (1982), "Markets as Economizers of Information: Experimental Examination of the Hayek Hypothesis," Economic Inquiry, April, 165-179.