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. (2016), "Macroeconomics: A Survey of Laboratory Research" in J.H. Kagel and A.E. Roth (Eds.), The Handbook of Experimental Economics Vol. 2, Princeton: Princeton University Press, 2016, pp 1-90.

Consumption Smoothing and Asset Pricing

In this lecture we will consider the experimental evidence on intertemporal consumption and savings decisions. In particular, we ask whether agents intertemporally smooth consumption as predicted by standard lifecycle models.  We will explore some behavioral explanations for departures from this rational choice prediction.  In addition, we will look at the pricing of assets which play an important role in intertemporal consumption smoothing.  We will explore several experimental tests of asset pricing models and explanations for why asset prices often appear to depart from fundamental values.

• Readings:​​

Ballinger, T.P., M.G Palumbo, and N.T. Wilcox, “Precautionary Saving and Social learning Across Generations: An Experiment,” The Economic Journal, 2003, 113 (490), 920–947.

Brown, Alexander L, Zhikang Eric Chua, and Colin Camerer, “Learning and Visceral Temptation in Dynamic Savings Experiments,” Quarterly Journal of Economics, 2009, 124 (1), 197–231.

Carbone, E. and J.D. Hey, “The effect of Unemployment on Consumption: an Experimental Analysis,” The Economic Journal, 2004, 114 (497), 660–683.

Duffy, J. and Y. Li “Lifecycle Consumption Under Different Income Profiles: Experimental Evidence” working paper, UC Irvine, 2018.

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

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

Michael Kirchler Jürgen Huber Thomas Stöckl, “Thar She Bursts: Reducing Confusion Reduces Bubbles”, American Economic Review, 2012, 865-83.

Bao, T., J. Duffy and C. Hommes, “Learning, Forecasting and Optimizing: An Experimental Study” European Economic Review, Vol. 61, 2013, 186-204.

Crockett, S., Duffy J. and Y. Izhakian , “An Experimental Test of the Lucas Asset Pricing Model” forthcoming in the Review of Economic Studies.

Frank Heinemann

• Understanding Financial Crises: The Contribution of Experimental Economics

The patterns of financial crises are remarkably predictable. Minsky (1972) has described these patterns by phases, some of which contain behavioural hypotheses that can be tested by laboratory experiments. Under which conditions can bubbles arise? When do they burst? Why do people herd and does herding destabilize financial markets? What triggers a bank run and how do people coordinate in an environment with multiple equilibria? This lecture will lay out experimental evidence containing some answers to these questions. In particular, we will look at experiments on games with strategic complementarities. How predictable are choices if the game has multiple equilibria and which theory is well-suited to give advice for individual behavior? Managing information flow is one of the major challenges for central banks and bank supervisors. The lecture explains what we can learn from experiments for managing information flow in the presence of strategic complementarities.

• Literature:

Minsky, H.P. (1972), Financial Instability Revisited: the Economics of Disaster

Brunnermeier, Markus, and John Morgan (2008), Clock Games: Theory and Experiments, Games and Economic Behavior, forthcoming, http://www.princeton.edu/~markus/research/papers/clock_games.pdf

Kübler, Dorothea, and Georg von Weizsäcker (2004), Limited Depth of Reasoning and Failure of Cascade Formation in the Laboratory, Review of Economic Studies 71, 425-442.

Schotter, Andrew, and Tanju Yorulmazer (2009), On the Severity of Bank Runs,  Journal of Financial Intermediation 18, 217-241.

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

Cornand, C., and F. Heinemann (2010), Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities, CESifo Working Paper 2947

Heinemann, Frank (2012), Understanding Financial Crises: The Contribution of Experimental Economics, Annals of Economics and Statistics, 107-108, 2012, pp. 7-29,

http://www.macroeconomics.tu-berlin.de/fileadmin/fg124/heinemann/publications/Understanding_Financial_Crises.pdf

• 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. This lecture first presents some of the theoretical background and derives testable hypotheses. Then, it 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.

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

• 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.

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

Rosemarie Nagel

• Methodology

This lecture introduces the methods of experimental economics. We will discuss what is an economic experiment (field vs lab experiment), the different areas in experimental economics and behavioral economics, the link between experimental economics, theory and empirical work, important design issues, and the link between micro and macro experiments. All this will be discussed with the classical Keynesian Beauty Contest game. This introduction is meant to give a quick introduction to those who have never followed an experimental economic course. Prior to the course we will send the participants of the summer school some classical experiments which they can do online.

• General literature :

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

Handbook of Experimental Economics, Vol1 (1995), Vol2 (2016), editors J. Kagel &A. Roth

Camerer, C. (2003), "Behavioral Game Theory," Princeton University Pre2016ss

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

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

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).

Papers related to the Beauty Contest game

Mauersberger, F. and Nagel, R. (2018). Levels of Reasoning in Keynesian Beauty Contests: A Generative Framework in the Handbook of Computational Economics, Volume 4, Heterogeneous Agents. Editors: Cars Hommes and Blake LeBaron. Amsterdam: North-Holland.

Vincent P. Crawford, Miguel A. Costa-Gomes, and Nagore Iriberri (2012) "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications," forthcoming in Journal of Economic Literature. http://weber.ucsd.edu/~vcrawfor/CGCIJEL4April12

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

Giorgio Coricelli, Rosemarie Nagel, "Neural correlates of depth of strategic reasoning in medial prefrontal cortex" Proceedings of the National Academy of Sciences (PNAS): Economic Sciences, PNAS June 9, 2009 vol. 106.

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

Luba Petersen

Monetary Policy Experiments

In this lecture, we will explore how laboratory experiments can be used to inform the design and implementation of monetary policy. We will begin by reviewing the various approaches to studying the effects of monetary policy (theory, computational, empirics, experiments), and considering their strengths and weaknesses. Different experimental approaches to studying monetary policy will be considered (individual choice experiments, coordination experiments involving expectations and real decisions), followed by a survey of the literature and findings. An important question is: why does monetary policy not work better? Are there cognitive limitations that inhibit the public's ability to respond to monetary policy? Or does the weak

transmission of monetary policy stem from an inability to coordinate. We will consider empirical and experimental evidence on the transmission of monetary policy, and possible directions forward for research.

• Theory

Walsh, C. E. (2017). Monetary theory and policy. MIT Press.

Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. Princeton University Press.

• Experiments

Adam K. (2007), “Experimental Evidence on the Persistence of Output and Inflation,” Economic Journal 117, 603–635.

Arifovic, J. and L. Petersen (2017). “Stabilizing expectations at the zero lower bound: Experimental evidence”, Journal of Economic Dynamics and Control, 82, 21-43.

Arifovic J. and T. J. Sargent (2003), “Laboratory Experiments with an Expectational Phillips Curve,“ in D. E. Altig, and B. D. Smith (eds.), Evolution and Procedures in Central Banking,

Cambridge University Press, Cambridge. Arifovic J. and J. H. Jiang (2013), "Experimental Evidence of Sunspot Bank Runs," mimeo Bank of Canada.

Assenza, T., Heemeijer, P., Hommes, C., & Massaro, D. (2013). Individual expectations and aggregate macro behavior.

Bernasconi M. and O. Kirchkamp (2000), “Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model,” Journal of Monetary Economics 46, 315‐ 343.

Blinder A. S. and J. Morgan (2005), “Are Two Heads Better than One? Monetary Policy by Committee,” Journal of Money, Credit, and Banking 37, 789‐812. Blinder A. S. and J. Morgan (2008), “Leadership in Groups: A Monetary Policy Experiment,” International Journal of Central Banking 4(4), 117‐150.  

Bosch‐Domenech A. and J. Silvestre (1997), “Credit Constraints in a General Equilibrium: Experimental Results,” Economic Journal 107, 1445‐1464.

Cornand, C., & M'baye, C. K. (2016). Does inflation targeting matter? an experimental investigation. Macroeconomic Dynamics, 1-40.

Engle‐Warnick J. and Turdaliev N. (2010), “An Experimental Test of Taylor‐Type Rules with Inexperienced Central Bankers,” Experimental Economics 13, 146‐166.

Fehr E. and J.‐R. Tyran (2001), “Does Money Illusion Matter?,” American Economic Review 91, 1239‐ 1262.

Fehr E. and J.R. Tyran (2005), “Individual Irrationality and Aggregate Outcomes," Journal of Economic Perspectives 19, 43‐66.

Fehr E. and J.‐R. Tyran (2008), “Limited Rationality and Strategic Interaction: The Impact of the Strategic Environment on Nominal Inertia,” Econometrica 76, 353‐394.

Fehr E. and J.‐R. Tyran (2014), “Does Money Illusion Matter?: Reply,” American Economic Review 104, 1063‐1071.

Fenig, G., Mileva, M., & Petersen, L. (2018). Deflating asset price bubbles with leverage constraints and monetary policy. Journal of Economic Behavior and Organization, 155, 1-27.

Fischbacher, U., Hens, T., & Zeisberger, S. (2013). The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab. Journal of Economic Dynamics and Control, 37(10), 2104-2122.

Kryvtsov O and L. Petersen (2013), “Expectations and Monetary Policy: Experimental Evidence,” Bank of Canada Working Paper.

Lian P. and C. Plott (1998), “General Equilibrium, Markets, Macroeconomics and Money in a Laboratory Experimental Environment,” Economic Theory 12,  21‐75.

Noussair C. N., D. Pfajfar and J. Zsiros (2014), “Frictions, Persistence, and Central Bank Policy in an Experimental Dynamic Stochastic General Equilibrium Economy,” in J. Duffy (eds.), “Experiments in Macroeconomics”, Research in Experimental Economics 17, Emerald Press.  

Petersen L. and A. Winn (2014), “Does money illusion matter?: Comment,” American Economic Review 104, 1047‐1062.

Pfajfar, D., & Žakelj, B. (2016). Inflation expectations and monetary policy design: Evidence from the laboratory. Macroeconomic Dynamics, 1-41.

Shyam Sunder

• Complexity and Abstraction: Designing Macro Experiments

Relevant real world phenomena and relevant models of interest serve as two important benchmarks in designing laboratory experiments. With their fractal structure, phenomena in field are endlessly complex. Accordingly, realism (i.e., fidelity to the field environment) and theory (i.e., fidelity to the model) place important, often conflicting, demands on design of laboratory experiments.  Do the details matter? Which ones do? How do we find out? Why do the details that "do not matter" exist in the field? If they are just matters of refinement, which refinements are and are not to be ignored in laboratory? How generalizable are the laboratory findings? How does an experimenter find his way through this maze that connects limitless complexity of the field to simple tidy models of economics to gain a better understanding of economic phenomena? We shall explore the practical problems of identifying interesting questions, and developing experimental designs to address them using some examples, notes, and some macro experiments.

Sunder, Shyam. "Determinants of Economic Interaction: Behavior or Structure."Journal of Economic Interaction and Coordination 1, no. 1 (May 2006): 21-32. Text (PDF).

Sunder, Shyam. "Real Phenomena, Theory and Design of Laboratory Experiments in Economics." Notes. Text (PDF).

Lim, Suk S., Edward C. Prescott and Shyam Sunder. "Stationary Solution to the Overlapping Generations Model of Fiat Money: Experimental Evidence." Empirical Economics 19, no. 2 (1994): 255-277. Text (PDF)

Marimon, Ramon and Shyam Sunder. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence." Econometrica 61, no. 5 (1993): 1073-1108. Text (PDF).

Marimon, Ramon and Shyam Sunder. "Expectations and Learning Under Alternative Monetary Regimes: An Experimental Approach." Economic Theory 4 (1994), 131-162. Text (PDF)

Huber, Juergen, Martin Shubik, and Shyam Sunder. "Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence," Cowles Foundation Discussion Paper 1830, October 23, 2011.

Huber, Juergen, Martin Shubik and Shyam Sunder. "Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence." Cowles Foundation Discussion Paper No. 1675, Revised June 12, 2011.

• Experiments with Minimally Intelligent Agents and Minimal Institutions

Laboratory exploration of properties of economic institutions and policies has traditionally been done using profit motivated human traders. Outcomes of such experiments, when compared with outcomes of identical economies populated with minimally intelligent algorithmic agents yield valuable insights. We can isolate which of the properties of the economies of interest arise from their structure, and which ones are attributable to the behavior of agents. Starting with three micro applications, we shall study three macro applications of this human-algorithm hybrid approach to experimentation.

Gode, Dhananjay K. and Shyam Sunder. "Allocative Efficiency of Markets with Zero Intelligence Traders: Market as a Partial Substitute for Individual Rationality." The Journal of Political Economy 101, no. 1 (February 1993): 119-137.Text (PDF).

Gode, Dhananjay and Shyam Sunder. "What Makes Markets Allocationally Efficient?" Quarterly Journal of Economics 112, no. 2 (May 1997), 603-630. GSIA Reprint No. 1473.Abstract (PDF), Text (PDF).

Gode, Dhananjay K., and Shyam Sunder. "Double Auction Dynamics: Structural Effects of Non-Binding Price Controls."Journal of Economic Dynamics and Control 28, no. 9 (July 2004): 1707-1731. Abstract(PDF), Text (PDF).

Huber, Juergen, Martin Shubik and Shyam Sunder. "Three Minimal Market Institutions: Theory and Experimental Evidence."Games and Economic Behavior 70 (2010) 403-424.

Angerer, Martin, Juergen Huber, Martin Shubik and Shyam Sunder. "An Economy with Personal Currency: Theory and Experimental Evidence." Annals of Finance, Volume 6, Number 4, October 2010, pp.475-509.

Huber, Juergen, Martin Shubik and Shyam Sunder. "Default Penalty as a Selection Mechanism Among Multiple Equilibria."Cowles Foundation Discussion Paper 1730R, Revised February 6, 2011.