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 15-19, 2009. 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

Day 2: Financial Markets and Stabilization Policies

Day 3: Monetary Theory and Policy

Day 4: Rational and Bounded Rational Reasoning and Sunspots

Day 5: Global Games and Student Presentations

John Duffy

John Duffy is Professor of Economics at the University of Pittsburgh.  He earned his PhD at UCLA in 1992.  He is currently director of the Pittsburgh Experimental Economics Laboratory and serves on the editorial boards of European Economic Review, Experimental Economics, Games and Economic Behavior, and the Journal of Economic Dynamics and Control.  Duffy's research interests include asset pricing, monetary economics, learning and expectations in macroeconomic models and coordination problems.

Selected publications:

"Macroeconomics: A Survey of Laboratory Research" to appear in Handbook of Experimental Economics, Volume 2, A. Roth and J. Kagel, editors.

"Cooperative Behavior and the Frequency of Social Interaction," (with J. Ochs), forthcoming in Games and Economic Behavior.

"Sunspots in the Laboratory," (with E. O'N. Fisher), American Economic Review 95 (2005), 510-529.

Intrinsically Worthless Objects as Media of Exchange: Experimental Evidence," (with J. Ochs), International Economic Review 43 (2002), 637-673.

Frank Heinemann

Frank Heinemann is Professor of Macroeconomics at Berlin Institute of Technology, 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:

 "Speculative Attacks with Multiple Sources of Public Information" (with Camille Cornand), Scandinavian Journal of Economics 111 (1), 2009, pp. 73-102.

"Optimal Degree of Public Information Dissemination" (with Camille Cornand), The Economic Journal 118 (April), 2008, pp. 718-742.

"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 at the Universitat Pompeu Fabra (UPF), research director of the experimental laboratory (LEEX-UPF), 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 of University of Trento, Lyon, UPF, and in workshops by the Muenchner Rueck and Bayerische Hypobank. Her research interest is in experimental and behavioural economics and neuro economics.

Selected publications:

"Measuring Strategic Uncertainty in Coordination Games" (with Frank Heinemann and Peter Ockenfels), Review of Economic Studies, 76, 2009, pp. 181-221.

"Equilibrium Selection Through Incomplete Information in Coordination Games: An Experimental Study." (with Antonio Cabrales, and Roc Armenter), Experimental Economics 10 (3), 2007, p 221-234.

"One, Two, (Three), Infinity...: Newspaper and Lab Beauty-Contest Experiments", (with Antoni Bosch-Domènech , Jose García-Montalvo , and Albert Satorra), American Economic Review December 92 (5), 2002, pp 1687-1701.

"Unraveling in Guessing Games: An Experimental Study." American Economic Review 85 (5), 1995, pp1313-1326.

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:

Duffy, J. (fortcoming), "Macroeconomics: A Survey of Laboratory Research" to appear in Handbook of Experimental Economics, vol. 2, edited by John Kagel and Al Roth.

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.

• Asset Pricing: Bubbles, Crashes and Expectations

Currently, economies around the world are experiencing an economic downturn brought about by the collapse of housing and equity prices and the deleveraging of the financial institutions that underwrote those assets.  In this lecture we examine laboratory studies addressing asset pricing and the phenomenon of asset price bubbles and crashes.  An understanding of the causes of asset price bubbles and cashes is of obvious importance to both policymakers and asset market participants. While there exists experimental designs that reliably yield asset price bubbles and crashes among inexperienced subjects, there remains much more work to be done on this topic, for instance, there is a need for an experimental design in which asset price bubbles and crashes are recurrent phenomena.

Smith, Vernon, Gerry L. Suchanek and Arlington W. Williams, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, 56, 1119-1151.

Lei, Vivian, Charles N. Noussair and Charles R. Plott 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, 69, 831-859.

Dufwenberg, Martin, Tobias Lindqvist and Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, 95, 1731-1737.

Hommes, Cars.H., Joep Sonnemans, Jan Tuinstra and Henk van de Velden, 2005."Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies 18, 955-980.

Ernan Haruvy, Yaron Lahav and Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review 97, 1901-1920.

Crockett, Sean and John Duffy, 2009. "A General Equilibrium Approach to Asset Pricing Experiments." working paper.

• 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 Economics 46, 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.

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," Econometrica72 (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.

• 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.

• Stabilizing Inflation and Employment

Dynamic stochastic general equilibrium (DSGE) models are the new paradigm of macroeconomics. Within these models, monetary policy is reduced to a dynamic control problem. Under some restrictions, the optimal solution to such a control problem can be described by a simple linear function with which the instrument (interest rate) responds to current (and lagged) inflation and output. One of the major problems of modern central banks is model uncertainty. There is uncertainty about the true model and its parameters. With model uncertainty, the instrument should gradually respond to observed deviations of inflation and output from their target values. In reality, monetary policy is conducted by committees instead of single agents. This raises the questions whether and why groups are better in dealing with dynamic control problems than individuals and how they come to an agreement in cases of diverging opinions. Some recent experiments put subjects in the role of central bankers and let them solve dynamic control problems of an economic model whose parameters are not known to subjects. Subjects have to solve these problems either individually or ion small groups. It turns out that most subjects are able to control inflation and their strategies can be described by Taylor-type rules. Groups do significantly better than individuals. The modes by which groups are organized (size, voting rules, leadership) have no significant effect.

• Literature:

Theory:

Clarida, R., J. Gali, and M. Gertler (1999), "Thge Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature 37, 1661-1707.

Taylor, J. (1993), "Discretion vs. Policy Rules in Practise", Carnegie-Rochester Conference Series on Public Policy 39, 195-214.

Experiment:

Blinder, Alan, and John Morgan (2005), "Are Two Heads Better than One? Monetary Policy by Committee," Journal of Money, Credit, and Banking 37, 789-811.

Blinder, Alan, and John Morgan (2007), "Leadership in Groups: A Monetary Policy Experiment," working paper.

Engle-Warnick, Jim, and Nurlan Turdaljev (2007), "An Experimental Test of Taylor-Type Rules with Inexperienced Central Bankers," working paper.

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 and behavioral 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)

• Rational and boundedly rational expectation: a micro and macro view

In this lecture we will discuss how micro and macro economics incooporate bounded rational expectations in their models. Most macroeconomic models presume that agents (usually a representative agent) posses rational expectations, that is, expectations consistent with knowledge of the model. Laboratory tests of the rational expectations hypothesis suggest that subjects do not initially form expectations consistent with the rational expectations hypothesis; in many cases, expectations are more consistent with an adaptive learning process. However, there is some evidence that individuals can learn to form rational expectations with sufficient experience.

Most micro economic models assume that people make acurate predictions about others behavior. Typically one assumes common knowlege of rationality among the agents which means that everybody is rational and thinks that all are rational etc. Based on this assumption equilibria are calculated. There are at least two streams to explain deviations from equilibrium. One part is to develop learning models which deviate in different degrees from rationality. The second stream is to assume that an agent might think that he is rational but does not think that others are rational but instead models them as random players. Or he might think that others are rational but these others do not believe that their coplayers are rational. etc. This way one can formulate different degrees of levels of reasoning about the rationality of others. We will discuss this second stream of literature.

• Literature:

Williams, A.W. (1987), "The Formation of Price Forecasts in Experimental Markets," Journal of Money, Credit and Banking 19, 1-18.

Dwyer, Jr., G.P., A.W. Williams, R.C. Battalio and T.I. Mason (1993), "Tests of Rational Expectations in a Stark Setting," Economic Journal 103, 586-601.

Marimon, R. and S. Sunder (1993) "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica 61, 1073-1107.

Hommes, C.H., J. Sonnemans, J. Tuinstra and H. van de Velden (2007), "Learning in Cobweb Experiments," Macroeconomic Dynamics 11 (Supplement 1), 8-33.

Camerer, C. F. (2003). Chapter 5, Dominance Solvable Games. Behavioral game theory: Experiments on strategic interaction. Princeton, Princeton University Press.

Nagel Rosemarie (1995), "Unraveling in Guessing Games: An Experimental Study." American Economic Review 85,5, 1313-1326.